Sustainable Development Impacts of Investment Incentives3.1 Overview of development and investment policies in the mining and quarrying 15 industry 3.2 Investment incentives in the

SustainableDevelopment

Impacts ofInvestment

Incentives

Vu Xuan Nguyet Hong Ngo Minh TuanHo Cong HoaCentral Institute for Economic Management, Vietnam

2009

A Case Study of the Mining Industry in Vietnam

Copyright © 2009 International Institute for Sustainable Development

Published by the International Institute for Sustainable Development

International Institute for Sustainable Development161 Portage Avenue East, 6th FloorWinnipeg, ManitobaCanadaR3B 0Y4Tel: (204) 958-7700Fax: (204) 958-7710E-mail: [email protected] site: http://www.iisd.org

Sustainable Development Impacts of Investment Incentives: A Case Study of the Mining Industry inVietnam

Vu Xuan Nguyet Hong Ngo Minh TuanHo Cong HoaCentral Institute for Economic Management, Vietnam

Sustainable Development Impacts of Investment Incentives: A Case Study of the Mining Industry in Vietnam

trade knowledge network

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About the Trade Knowledge Networkhttp://www.tradeknowledgenetwork.net

The Trade Knowledge Network is a global collaboration of research institutions across Africa, Asia,Europe and the Americas working on issues of trade and sustainable development. Coordinated by theInternational Institute for Sustainable Development (IISD), the TKN links network members,strengthens capacity and generates new research to assess and address the impact of trade and investmentpolicies on sustainable development. The overarching aim of the TKN is to help ensure that trade andinvestment contribute to sustainable development, with social development and the environment equitablyaddressed in trade and investment policies. The TKN furthers this aim by generating compelling researchwith clear policy recommendations and communicating those effectively to decision makers nationally,regionally and globally.

The TKN is hosted by the International Institute for Sustainable Development, a Canada-based not-for-profit organization promoting change towards sustainable development. As a policy research institutededicated to the effective communication of its findings, the Institute engages decision-makers ingovernment, business, NGOs and other sectors in the development and implementation of policies thatare simultaneously beneficial to the global economy, the global environment and to social well-being.

This study is part of a larger TKN project that seeks to better understand the impacts of investmentincentives on sustainable development. Similar country case studies were carried out for the pharmaceuticalindustry in Singapore (by the Singapore Institute for International Affairs), the chemical industry inIndonesia (by the Center for Asia Pacific Studies at Gadjah Mada University, Indonesia) and the tourismindustry in Malawi (by the University of Malawi and the South African Institute for International Affairs).In addition, a regional study examines the effectiveness of investment incentives in attracting FDI andpromoting economic growth, social development and environmental protection in Southeast Asia. Finally,a checklist sets out some key issues and questions to be addressed when assessing the sustainabledevelopment impacts of investment incentives. The project outputs are available on the TKN website.

About the International Institute for SustainableDevelopment (IISD)http://www.iisd.org

The International Institute for Sustainable Development contributes to sustainable development byadvancing policy recommendations on international trade and investment, economic policy, climatechange, measurement and assessment, and natural resources management. Through the Internet, wereport on international negotiations and share knowledge gained through collaborative projects withglobal partners, resulting in more rigorous research, capacity building in developing countries and betterdialogue between North and South.

IISD’s vision is better living for all—sustainably; its mission is to champion innovation, enablingsocieties to live sustainably. IISD is registered as a charitable organization in Canada and has 501(c)(3)status in the United States. IISD receives core operating support from the Government of Canada,provided through the Canadian International Development Agency (CIDA), the InternationalDevelopment Research Centre (IDRC) and Environment Canada; and from the Province of Manitoba.The Institute receives project funding from numerous governments inside and outside Canada, UnitedNations agencies, foundations and the private sector.



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About the Central Institute for Economic Management(CIEM)http://www.ciem.org.vn/

The Central Institute for Economic Management (CIEM) is a national institute under the directauthority of the Ministry of Planning and Investment. Its functions are: to undertake research and putforward proposals and recommendations on economic laws and regulations (institutions), policies,planning and management mechanisms, business environment and economic renovation; in additionto research, it gives training and re-training to economic management staff and provides consultancyservices in accordance with the laws and regulations. Some of the main activities of the CIEM include:

■ To conduct research and work out projects on renovating economic laws and regulations,policies and management mechanisms, planning, business environment and othermacroeconomic and interdisciplinary issues as assigned by the Minister of Planning andInvestment;

■ To conduct, in co-ordination with other departments of the Ministry, research and to work outlegal documents on issues pertaining to the Institute’s own research fields as assigned anddirected by the Minister of Planning and Investment;

■ To make synthesizes and proposals on the needed amendments to the existing policies or on newpolicies; to participate in research and appraisal of macroeconomic policies, mechanisms draftedby other Ministries and line state agencies;

■ To organize and implement scientific research programs pertaining to the fields of researchassigned to it as also to other fields in accordance with the laws and regulations;

■ To summarize the domestic economic management realities and international experiences;

■ To research on theories and methodologies relating to economic management science andplanning; to study the practical situation of Vietnam and help to develop its economicmanagement science;

■ To provide assistance, technical and in terms of contents to the Central Club of EnterpriseDirectors and to coordinate with the clubs of enterprises directors in various provinces;

■ To publish the quarterly journal of Economic Management;

■ To provide consultancy services on economic management; to conclude and implement researchcontracts; to take part in the training and retraining of economic management staff and toprovide graduate and post-graduate courses in accordance with the laws and regulation.



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Acknowledgements

The authors are grateful to the Trade Knowledge Network (TKN) and the Central Institute forEconomic Management (CIEM) for supporting us throughout this study. We wish to extend specialthanks to Heike Baumüller (International Institute for Sustainable Development) and Kenneth P.Thomas (University of Missouri-St. Louis) for their guidance on research methodology and techniquesthroughout the study’s implementation. In particular, they have provided valuable comments about ouroutlines and the first draft of the study report.

This study would have not been completed without the reflective collaboration of Miss Le Hai Van (anexpert in the Foreign Investment Agency) and the General Statistical Office (under the Ministry ofPlanning and Investment), who provided primary data about FDI projects in the mining and quarryingindustry and the data of enterprise surveys of the period 2001–2006. High praise goes to Mr. PhamHoang Ha (Department of Macroeconomic Policy, CIEM), who participated in analyzing the enterprisesurvey data. Dr. Simon McCoy (an expert of CIEM-DANIDA project on “Policy analysis capacitystrengthening” funded by Danish government for CIEM) contributed to the success of this project byhelping us edit the English version and providing very useful comments on the first draft of the studyreport. Each contribution has led to the report’s success and we would therefore like to express sinceregratitude to all of them.

The authors would like to express our deep-felt appreciation for the foreign-invested enterprises in themining and quarrying sector that devoted their valuable time to answering our questionnaires. Specialthanks to Chevron Vietnam’s management representatives for their meeting with us to share informationabout issues related to their investment project implementation in Vietnam.

Finally, the team of authors takes full responsibility for any errors or shortcomings in this report.

Official Exchange Rate (VND/US$)1:

2001 13933 VND/US$2004 (31 Dec.) 15749VND/US$2006 (30 Dec.) 16101VND/US$

1 See more at the Website of the State Bank of Vietnam (www.sbv.gov.vn/vn/CdeQLNH/tygia.jsp)



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Table of Contents

Acknowledgements iv

Acronyms and Abbreviations vii

Executive Summary viii

1. Objectives and Methodology 1

1.1 Objectives and scope 1

1.2 Methodology 2

2. Overview of FDI Promotion Policies in Vietnam 4

2.1 Targets for national development and Vietnam’s FDI attraction policy 4

2.2 Overview of investment incentives in Vietnam 10

2.3 Bilateral and regional investment treaties and negotiations 14

3. Overview of the Mining and Quarrying Industry and Related Investment Incentives in 15Vietnam

3.1 Overview of development and investment policies in the mining and quarrying 15industry

3.2 Investment incentives in the mining and quarrying industry 19

3.3 Trade-related investment measures in the mining and quarrying industry 21

4. Impacts of Investment Incentives on Decisions of Foreign Investors: The mining and 22quarrying industry

5. Analysis of the Impact of Investment Incentives for FIEs in the Mining and Quarrying 26Industry on Sustainable Development

5.1 Sustainable development determinants of FIEs 28

5.2 The impacts of FDI on sustainable development in the mining and quarrying industry 29

6. Conclusion and Policy Recommendations 36

6.1 Main conclusions 37

6.2 Policy recommendations 39

6.3 Notes and recommendations for further research 40

Bibliography 42

Appendix 1: List of sectors on which investment is conditional as applicable to foreign investors 46

Appendix 2a: List of domains entitled to investment incentives 47

Appendix 2b: List of geographical areas entitled to investment incentives 53

Appendix 3: Survey question asked of FDI firms in the mining and quarrying sector 55



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Figures, Tables and Boxes

Figure 1: Social investment composition of Vietnam by ownership type (1991–2007) 5

Figure 2: National and sector growth rates by ownership (1995–2007) 5

Figure 3: FDI trends in the mining and quarrying industry (1988–2007) 18

Figure 4: FDI composition in the mining and quarrying industry by category 18

Figure 5: Investors’ assessment of factors influencing their investment decisions 24

Figure 6: Enterprise assessment of factors influencing their sustainability-oriented behaviour 29

Figure 7: Turnover of enterprises in mining and quarrying industry (2001–2006) 30

Figure 8: Productivity comparison between FDI and domestic enterprises 31

Figure 9: Comparison of charter capital and realized capital of FIEs in the mining and 32quarrying industry

Figure 10: Average employee income in the mining and quarrying industry (2001–2006) 35

Table 1: Summary of investment registration procedures under the Common Law on 9Investment 2005

Table 2: Summary of current investment incentives 13

Table 3: Role and development trends in the mining and quarrying sector within the 16Vietnamese industry (2000–2007)

Table 4: Structure of FIEs surveyed for the study 23

Table 5: Significance level of investment incentives for enterprises in the mining and 25quarrying industry

Table 6: Sustainable development commitments between enterprises and local governments 26

Table 7: Comparison of Vietnamese royalty rates with other selected countries in Asia-Pacific 27

Table 8: Number of enterprises and employees as taken from the General Statistical Office 29surveys (2001–2006)

Table 9: Estimate of corporate income tax incentive value for FIEs in the mining and 34quarrying industry

Table 10: Enterprise investment in environmental protection in the mining and quarrying 36industry

Box 1: Case study of “fence breaking” in investment incentives in local provinces 11

Box 2: Proposed increase to natural resource royalty by the Ministry of Finance 40



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Acronyms and Abbreviations

ACIA ASEAN Comprehensive Investment AgreementASEAN Association of Southeast Asian Nations BCC business cooperation contractBOT Build – Operate – Transfer BT Build – Transfer BTA Bilateral Trade Agreement BTO Build – Transfer – Operate CIEM Central Institute for Economic ManagementCIT corporate income tax EIA environmental impact assessment FDI foreign direct investment FIE foreign invested enterpriseFIA foreign investment agencyGATS general agreement on trade in servicesGDP gross domestic product GSO general statistic office IISD International Institute for Sustainable DevelopmentLao PDR Lao People’s Democratic Republic MNC multinational corporationMOU memorandum of understandingMPI Ministry of Planning and Investment (Vietnam)ODA official development assistance OECD Organization for Economic Cooperation and Development R&D research and developmentSCCI State Committee on Cooperation and Investment (Vietnam)SCM subsidies and countervailing measuresSOEs state-owned enterprises TKN Trade Knowledge Network TRIMs trade-related investment measuresTRIPs trade-related aspects of intellectual property rightsUSAID United States Agency for International DevelopmentVAT value added taxVCCI Vietnam Chamber of Commerce and IndustryVND Vietnam dongWB World Bank WTO World Trade Organization



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Executive Summary

As a developing country in the region, Vietnam has had impressive achievements in attracting foreigndirect investment (FDI) in the last two decades. Vietnam has gradually improved their legal system andinvestment policies to create very favourable conditions for foreign investors in compliance with basicprinciples of international trade and investment, as they relate to agreements of which Vietnam is amember (including the multilateral trade agreements of the World Trade Organization). Although thereremains room for further improvement, Vietnam’s investment environment has attracted internationalorganizations and foreign investors. Together with other countries such as China and India, Vietnam hasbecome a leading FDI destination.

Similar to other developing countries, Vietnam needs desperately to mobilize foreign capital sources forcurrent and future economic development. In order to attract FDI inflow in the last two decades,Vietnam introduced a series of incentives for foreign investors, specifically tax, financing and investmentservices. However these incentives were not static, but gradually adjusted and improved over time. Since2005, investment support policies were largely applicable to both domestic and foreign investors. Coreprinciples of investment promotion policies—including non-discrimination, transparency,forecastability, protection of investor’s ownership and contract enforcement—have been integrated inVietnam’s current legal documents and policy system. However, laws, regulations and policies have beenonly sporadically enforced. Foreign investors are still faced with difficulties when implementing theirinvestment projects due to the delayed issuance of guiding documents, the inconsistency in policyimplementation, and the frequent changes of current legal and policy system.

The mining and quarrying industry plays a significant role in the economy in general, and in theindustrial sector of Vietnam in particular. Although this sector requires thorough investment verificationby competent agencies upon the implementation of an investment project, it has attracted considerableinterest from foreign investors with 9.9 per cent of registered capital. In addition, foreign investedenterprises (FIEs) in this sector are entitled to investment incentives that are available for certain sectorsand locations. However for a sector that has great impact on the environment, current investmentincentives seem to be divorced from the industry’s social and environmental responsibilities. By law,projects are entitled to investment incentives if they qualify for investment incentive sectors and/orlocations, regardless of whether or not they are oriented toward sustainable development.

Most FIEs in this sector have enjoyed investment incentives provided by the Government of Vietnamin one way or another. Tax incentives, especially corporate income tax incentives, were the mostcommonly exploited by enterprises. In addition, some enterprises also enjoyed preferential credit orsupport for training activities or research and development. Among types of investment incentives, mostenterprises took advantage of tax incentives, which were most lucrative in comparison with otherincentives. However, investment incentives were considered an important factor, but not a prerequisite,for the foreign investors’ decisions to invest in Vietnam, or in the mining and quarrying sector inparticular. In addition to investment incentives, the equal and transparent investment environment andthe enforcement of the legal system were also crucial factors for investors in their investment decision.

Current government investment incentives are not a primary influence on FIEs’ sustainabledevelopment behaviour in the mining and quarrying industry, possibly because current incentive toolshave directed enterprises to investment-promoted sectors and locations, but have not encouraged arelationship between incentives and the sustainable development behaviour of enterprises. Althoughcurrent laws already stipulate that the State must encourage enterprises to be socially responsible and



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environmentally sustainable, these demands are not as strictly enforced as others and do not necessarilylead to socially responsible and sustainable behaviours. Until now, FIEs’ socially responsible behaviourtoward employees, community and the environment have mainly depended on policies held by theparent company abroad, the perfection of the legal system and its enforcement. The result reflects whatgoes on in the larger, global community of multinational corporations: passive rather than active roleson the part of enterprises when it comes to promoting and enforcing responsible sustainable behaviour.

In terms of economic sustainability, FIEs in the mining and quarrying industry outperformed domesticones with such assessment indicators as productivity, technology level, increased stable investmentcapital and contribution to state budget. However the state budget losses due to tax incentives, especiallycorporate income tax incentives granted to enterprises, were not small: they accounted for between 0.5and 0.7 percent of total industrial turnover in the sector during the period 2001–2006. So the questionwas whether the incentives policies for enterprises, which led to lost state revenue, were necessary whenthe foreign investors’ decision to invest in Vietnam was not actually due to the incentive entitlement.

In terms of social sustainability, FIEs in the mining and quarrying industry have sought to maintain areasonably high income for their employees (much higher than that in domestic enterprises in the samesector). However, enterprises have not demonstrated active attention to the social welfare of theiremployees with regard to vocational training, health care insurance, social insurance, and contributionto trade unions and other social organizations. While enterprises seem to have passively followed legalregulations, they have not been actively expanding their social responsibility. Perhaps monthly incomeis currently regarded as the most important factor to employees in Vietnamese enterprises, making themwilling to accept lower quality working conditions and less regard for their social welfare. However, asthe labour market and economy develop, enterprises must maintain an attractive social welfare policy tokeep their employees, to be able to compete with other enterprises in the same sector and to avoidnegative impacts on their production activity due to labour strikes.

In terms of environmental sustainability, mining and quarrying activity may potentially have negativeeffects on the environment. Though Vietnam has issued a basic legal framework to limit the negativeimpacts of industry operations on the environment, enterprises in Vietnam, and FIEs in particular, havenot actively taken measures to prevent pollution during their production process. Environmentalprotection activities by enterprises were mainly performed to satisfy current legal regulations, but didnot demonstrate a proactive stance in environmental protection work. Despite the lack of informationabout industrial compliance with environmental protection standards and regulations, based on theanalysis in this report, it is difficult to conclude that FIEs have fully complied with environmentalprotection regulations (for example, they may make investments in environmental protection, but donot run pollution treatment equipment).

Policy recommendations

Experience has shown that, once the national investment environment improves and creates favourableconditions for enterprises, and the legal system and investment policies have become transparent, clear,equal and effective, investment incentives introduced by the government will not be efficient inattracting both domestic and foreign investors. Although the favourable enterprise-oriented investmentenvironment has evolved, the Government of Vietnam needs to further improve current policies so thatthe above-mentioned principles can be fully incorporated in the legal system of the State from the centralto local levels. More importantly, it is essential to ensure the rapid and consistent implementation ofinvestment policies by competent government agencies.



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For Vietnamese investment incentives to influence enterprises to promote sustainable development, theState can consider the link between sustainable development targets and conditions for incentiveentitlement. At present, although some laws have confirmed that the State encourages enterprises todevelop sustainably, guiding documents on enterprise incentives have not been issued. Consequently,specific incentives for enterprises relating to sustainable development have only been appliedindividually depending on the local government’s level of awareness. During the negotiation, verificationand approval of investment projects, government agencies should be aware of the sustainabledevelopment objectives of the whole economy, as well as those of enterprises, to communicaterequirements for enterprises and force them to comply with legal regulations.

Post-investment inspection and monitoring should be further considered by government agencies toensure that enterprises are honouring their commitments. For enterprises to develop sustainably will notonly depend on setting sustainable development targets for enterprises, but will also rely on seriouscompliance with legal regulations by the corporations. Enterprises should be monitored and inspectedfrequently—with the participation of stakeholders such as civil society organizations, research institutesand the public—to ensure they are complying with legal regulations and commitments.

The public should be involved in monitoring the enterprises’ commitment to compliance. Investorsshould publish their intended commitments to protect the environment and make them available to thepublic. It would also be beneficial to recognize companies that comply with or exceed their sustainabledevelopment goals. Rewarding socially responsible behaviour with a prize or title creates positivepublicity for both the company and the concept of social responsibility.

Dialogue between the state and enterprise should increase so that both parties inform policy issues,exchange information and propose solutions to issues regarding sustainable development forcorporations. An increase in this dialogue in recent years between government agencies and the businesscommunity reflects an active measure to create policy dialogues between the public and the privatesectors at the national and local levels. However, to make these activities really efficient,recommendations and questions from enterprises should be resolved or publicly answered bygovernment agencies.

It is necessary to assess the efficiency of government incentives so as to make timely adjustments forindividual periods. A first step is to thoroughly reassess the efficiency of tax incentives for enterprises tomake suitable adjustments on incentive duration, incentive tax rates, etc.

The natural resource royalty system should encourage enterprises to conserve the non-renewable naturalresources of Vietnam. In a positive step forward, the Ministry of Finance intended to submit to theStanding Committee of the National Assembly a draft amendment of the Resolution on the naturalresource royalty framework, as stipulated in the Ordinance on Natural Resource Royalties. Theamendment suggested that royalty rates for some natural resource categories be increased by 10 to 30per cent. The increase in natural resource royalties for minerals is expected to limit the abundantexploitation, as well as to increase local state budget income to enable them financially to improve theenvironment and repair the infrastructure surrounding the exploited areas. Simultaneously, with thehigher royalty rate, enterprises will have to calculate the exploitation output to balance economics andefficiency, and to invest in intensive processing, which then helps protect the natural resources andenhance the natural resource value.

1 Objectives and Methodology

1.1 Objectives and scope

To date, despite a number of studies on foreign direct investment (FDI) impacts on the Vietnameseeconomy, there have been a limited number of studies on the impacts of investment incentives. Forexample, Fletcher (2002) attempted to estimate the dimension of tax incentives for attracting FDI inthe Lao People’s Democratic Republic (Lao PDR), Cambodia and Vietnam. Nguyen et al.’s 2004empirical study focused on corporate income tax investment incentives for domestic companies inVietnam. V˜u Thành T·u Anh et al. (2007) looked at the phenomenon called “fence-breaking,” i.e., theprovision of extra-legal investment incentive to investors by some provinces of Vietnam. Until now,however, there has not been any analytical study on the impact of investment incentives on sustainabledevelopment in Vietnam. As a result, this study was conducted to add another approach to research onFDI impacts on Vietnam. The major objectives of this study are as follows:

■ Review and clarify the use of investment incentives in Vietnam to attract FDI inflow in theperiod of 2000–2006;

■ Identify whether investment incentives in Vietnam have had any sustainable impact oninvestors’ behaviours;

■ Provide recommendations to ensure that incentive-induced FDI promotes sustainabledevelopment in Vietnam.

In order to meet these research objectives, this study will not analyze sustainable development impactson FDI incentives at a national level, but look at these impacts at the enterprise level. Moreover due totime and budget limitations, this study will focus on the investment incentives’ impacts on sustainabledevelopment in enterprises in one selected economic sector, namely mining and quarrying. Therationale for choosing this particular sector is as follows:

(i) Mining and quarrying is one of the most important industries in Vietnam, accounting for 10per cent of total industrial output value, contributing to energy security and being an importantinput for other industries.

(ii) Minerals are non-renewable. The exploitation and use of natural resources will have a strongimpact on sustainable development in Vietnam’s future. So far, mining and quarrying have beenmainly conducted by the domestic state and private enterprises on a small scale, with outdatedtechnology, low efficiency and high losses in the extraction process. To call for foreigninvestment, Vietnam has introduced a series of investment incentives applicable to several typesof investment projects in this sector. However, the question is whether investment incentives arean effective policy for attracting foreign investors to invest in this sector.

(iii) In recent years, a number of foreign investors have been interested in the mining and quarryingsector. As a result, FDI inflow in the mining and quarrying sector has grown significantly. Thequestion is whether investors pour money into this sector specifically in order to enjoyinvestment incentives applicable in Vietnam. Have those incentives helped Vietnam meet FDIattraction targets set for this sector?



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In reality, to attract FDI inflows, developing countries often apply a “package” of investment incentivesfor foreign investors. Despite some similarities, investment incentive “packages” used in individualcountries may vary in terms of objectives, scale, scope, timing and duration. Within this framework,investment incentives selected for examination include three major groups: i) tax incentives; ii)investment support tools (for enterprises); and iii) incentives/support related to investment regulations.2

The study includes:

■ An overview of investment incentives applied in Vietnam in recent years, especially thoseintended to attract FDI inflow into Vietnam in general, and FDI inflow into mining andquarrying industry in particular. This task is mainly accomplished by reviewing existingdocuments, including legal documents issued by government agencies.

■ An overview of investment-related agreements endorsed or under negotiation between Vietnamand foreign partners, especially agreements related to investment incentives in general, andincentives for mining and quarrying industry in particular (if any).

■ An assessment of whether applied investment incentives in Vietnam have had any impact onforeign investors’ decisions to locate their project in Vietnam, especially within the mining andquarrying industry. To do so, the team selected several foreign invested enterprises (FIEs) toreceive written questionnaires (see Appendix 3 of this report) and give personal interviews.

■ A qualitative evaluation of the impacts of investment incentives on FIE sustainable developmentstrategies in the mining and quarrying industry, based on the enterprise survey data conductedby General Statistic Office (GSO) (under Ministry of Planning and Investment [MPI]) duringthe period 2002–2006.

1.2 Methodology

To date, there has been no research material proposing a unified approach for (qualitative andquantitative) analysis of the sustainable development impacts of investment incentives. This may beexplained partly by the difficulty in analyzing a correlation between investment incentives and thesustainable development of enterprises. More importantly, the impacts of sustainable development oninvestment incentives do not present themselves directly. In reality, objectives of investment incentivesintroduced by governments are mainly aimed at guiding investors into locations or sectors that thecountry wants to develop. As a result, investment incentives will first influence investors’ decisions.However, whether the investments promote sustainable development or not will depend on other factors(see Figure 17). Hence, to analyze the impacts of investment incentives on sustainable development withregard to FIEs in the mining and quarrying industry, the research team selected an indirect two-stepapproach as follows:

■ Step one: Examine investment incentive impacts on the investment decisions of foreigninvestors. Investment incentives, in reality, are only one of many factors that investors considerbefore deciding to invest in Vietnam. According to recent studies by the Organization forEconomic Cooperation and Development (OECD),3 in addition to investment incentives,

2 See IISD (2007).

3 OECD (2003).



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factors such as legal framework, infrastructure conditions, market size, production costs and theavailability of natural resources all affect the decision to invest in a country or sector. The impactof these factors on investors’ decisions may therefore vary between cases.

■ Step two: Examine whether foreign investors4 will ensure sustainable behaviour, i.e., whethertheir production activities are economically, socially and environmentally sustainable. There area number of studies identifying factors leading to sustainable development behaviour inenterprises. These factors can be categorized into two main groups:

– Group of external factors: the efficiency and effectiveness of the Vietnam’s legal framework(e.g., regulations on social and environmental issues); the effectiveness of incentives actuallyaccessible to enterprises; market requirements (customers); pressure from communities andsociety on enterprises’ sustainability practises, etc.

– Group of internal factors: the policy of parent companies when investing in Vietnam;enterprise policies on social responsibility; perceptions of company leaders about sustainabledevelopment, etc.

Data used in this study came from official statistical sources in Vietnam, provided by the GeneralStatistics Office (GSO) and Foreign Investment Agency (FIA; under Ministry of Planning andInvestment [MPI]). In addition to data regarding the analysis of investment incentive impacts oninvestments and sustainable development, the research team sent questionnaires to severalenterprises/investors in the mining and quarrying industry (for detailed questionnaire, see Appendix 3).This was combined with the data analysis from the 2002–2006 GSO survey on Vietnamese enterprises.

4 The foreign investors here include both those with and without investment incentives in the mining and quarrying sector.



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2. Overview of FDI Promotion Policies in Vietnam

2.1 Targets for national development and Vietnam’s FDI attraction policy

Starting at a low developmental level with low GDP per capita, Vietnam set the national developmenttarget for the 2001–2010 period at an average annual GDP of 7–7.5 percent, with the goal of becominga middle-income country by 2010 and an industrialized country by 2020.5 The socio-economicdevelopment plan for the 2006–2010 period emphasized the objective of “speeding up the economicgrowth rate, enhancing development efficiency and sustainability to quickly lift our country out of thepoor development situation.” The plan set an average annual GDP growth rate of 7.5–8 per cent for thewhole period with a 40 per cent increase in investments compared with an average of 37.5 per cent from2001 to 2005. It is estimated that domestic sources account for 65 per cent of social investment capital,while the remaining 35 per cent is covered by external sources,6 of which FDI is expected to come in at$24–25 billion,7 accounting for 17.1 per cent of the total social investment capital of the whole period.8

To meet these targets, one of the policies that has long been pursued by the Government of Vietnammobilizes all available resources, including domestic and foreign investment capital, to serve economicdevelopment targets. As described in Figure 1, to achieve the average GDP growth rate of 7.5 per centper annum in the last two decades, the proportion of investment over GDP continuously increased andreached 44 per cent of GDP in 2007. This showed that the growth of Vietnam in recent years wassignificantly increased by investment capital, including foreign direct investment (FDI). The ratio ofFDI to total social investment capital fell in the 1997–2004 period due to the impact of the regionaleconomic crisis, but gradually recovered and had a rapid increasing trend in recent years, especially in2007 after Vietnam entered the World Trade Organization (WTO). FDI accounted for 21.2 per cent ofthe total social investment value in 2007, much higher than the rate of 15.9 per cent in the previousyear,9 demonstrating the positive impacts of WTO accession to foreign direct investment inflow toVietnam10 (Figure 1).

Vietnam has opened its economy and attracted foreign direct investment since 1987 with the enactmentof the Law on Foreign Direct Investment. In the last 20 years, FDI always played an important role inthe overall national growth and became an integral part of the Vietnamese economy. The contributionof FDI to national GDP increased from 2 per cent in 1991 to 17.4 per cent in 2007.11 The growth rateof FDI was always higher than the average rate of the country (Figure 2). Recent studies affirmed thepositive contribution of this sector to the Vietnamese economy, which was demonstrated by economicindicators such growth, investment, export value and budget revenue.12 In addition, FDI was thoughtto have spillover effects on the economy via channels such as technology transfer, improved localmanagement skills and labour skills, and enhanced competitiveness of domestic enterprises.13 In reality,

5 Socio-economic development strategy in the 2001–2010 period.

6 It is noted that external capital sources here include Official Developmental Assistance (ODA).

7 Unless otherwise stated, $ amounts refer to US dollar.

8 The five year socio-economic development plan for the 2006–2010 period.

9 CIEM (2008).

10 Vietnam became official member of the World Trade Organization in November 2006 and started implementing its commitmentsin accordance with the agenda endorsed in early 2007.

11 Statistical Year Books from 2002 to 2007 of the GSO.

12 FIA (2008).

13 CIEM (2006).



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while there were a number of studies looking at the socio-economic impacts of FDI, few researchprojects have focused on FDI impacts over Vietnam’s sustainable development, including theconsolidation of economic, social and environmental protection aspects.14

Figure 1: Social investment composition of Vietnam by ownership type (1991-2007)

Source: Statistical year books of (GSO, 1991–2007)

The legal framework and foreign direct investment attraction policies have gradually improved to createan attractive investment environment and enhance socio-economic benefits from investment activities.Core principles of investment attraction policies like non-discrimination, transparency, predictability,ownership protection for investors and contract enforcement15 have gradually been established inVietnam’s legal framework and policies and implemented in practice. This has helped Vietnam becomeone of the more interesting targets for investment in recent years.16

Figure 2: National and sector growth rates by ownership (1995–2007)

Source: Statistical Year Books (various years, GSO).

14 Ibid.

15 OECD and MPI (2008).

16 Business Environment Report by the World Bank (WB) in 2007 ranked Vietnam at 91/178 nations compared with 104/175nations in the Report in 2006. World Investment Report (WIR) 2007 also showed that Vietnam was one of ten most attractiveeconomies in terms of investment by transnational corporations in the 2007–2009 period.



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Over the last 20 years, Vietnam’s goal of attracting foreign direct investment has been demonstrated inits strategy and five-year plans. In particular, this policy materialized in related laws and by-laws inVietnam. FDI attraction strategies have changed to match the development contexts in individualperiods. Major changes in FDI attraction policies in the last two decades included:

Legal framework

Prior to 2005, the investment promotion policy framework in Vietnam was governed by two majorlaws: the Law on Foreign Investment17 and the Law on Domestic Investment Promotion.18 In addition,Vietnamese investors have had to comply with other laws such as the Law on State-owned Enterprises,the Law on Enterprises, the Law on Corporate Income Tax, related professional laws and a system of by-laws.

The Common Law on Investment 200519 together with the new Law on Enterprises20 enacted in 2005and the Law on Intellectual Property Rights (2006) have unified fundamental regulations related toinvestment in Vietnam by domestic and foreign investors, gradually adjusting the investmentmechanism in Vietnam to comply with WTO commitments, enhancing decentralization and providingfurther business autonomy to investors. Generally, changes in the business-investment environment inVietnam have created more favourable conditions for investors, due to the legal reforms during theWTO accession process. Particularly, the Common Law on Investment has followed the non-discrimination principle (i.e., to accord equal treatment to foreigners and nationals) by unifyinginvestment regulations in Vietnam for both domestic and foreign investors. Moreover the CommonLaw on Investment is consistent with Vietnam’s WTO obligations.

Policy objectives

Initially, FDI promotion policies in Vietnam mainly aimed at supplementing and bridging thedifference between domestic savings and investment demands to meet economic development targets.With such an approach, FDI promotion policies focused on mobilizing as much FDI capital intoVietnam as possible. However, the objective of FDI attraction has gradually shifted toward a moresustained and mature direction. For instance, in addition to the target for committed FDI, the strategyand the five-year plan also set a target for disbursed FDI value. Moreover, the government issued a listof projects calling for foreign investors for the five year period21 and clearly defined sectors and areaswhere foreign investors have been entitled to incentives during given periods. Investments in preferredsectors and areas are entitled to investment incentives as stipulated by law (to be discussed in thefollowing section).

Since 2007, FDI attraction policies in Vietnam have been further directed in a more sustainable manner.At this stage, in addition to setting targets for higher FDI commitments and better-quality FDIdisbursement, the central and local governments of a number of provinces and cities also wanted toensure that this source of capital was being absorbed into the Vietnamese economy, aligning with the

17 First enacted in 1987; amended and improved in 1992, 1996, and 2000.

18 First enacted in 1994; amended in 1998.

19 This law was enacted to unify two previous laws, the Law on Foreign Investment (amended in 2000) and the Law on DomesticInvestment Promotion (amended in 1998).

20 In principle, it is applied to all types of enterprises in all economic sectors, excluding cooperatives and business households.

21 For reference on the list of projects calling foreign investors in 2006–2010 period, refer to www.vir.com.vn of the Investmentnewspaper, Ministry of Planning and Investment.



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national planning as well as the planning of individual provinces and regions. Most recently, thegovernments of some provinces even decisively refused FDI projects that had negative impacts on localenvironment and sustainable development.22

Investment sectors

Prior to 2000, the list of business sectors in which foreign investors were allowed to invest was restricted bylaw and often narrowed further whenever there were temporary policy adjustments.23 Some sectors that areconsidered strategic, such as power, telecommunication, insurance and banking, despite being open toforeign investment, have had restrictions placed upon them in terms of professional conditionality or statesupervision. The expansion to other business sectors by foreign investors is subject to permission. Indeed itwas generally difficult to get approval for this permit, in many cases as difficult as applying for a new projectinvestment license. After the US-Vietnam Bilateral Trade Agreement came into effect,24 such regulationswere loosened. Sectors such as legal advice, telecommunication, audit and design consultancy becameeligible immediately (2003), while others, such as banking and insurance, opened up later (in 2006).

According to the Common Law on Investment 2005 and its guiding documents,25 the right to investmentby investors has been improved from previous investment laws, transforming from a “list of permittedinvestment sectors, areas and locations” to a “list of exclusion and conditionality.” Investors are allowed toinvest in all sectors of the economy, excluding the forbidden and restricted ones. Restricted and conditionalinvestment areas applicable to foreign investors are compliant with the international agreements endorsedby Vietnam. The government regulates investment projects by planning. Government agencies at all levelsare responsible for issuing and publicizing information about land planning, infrastructure, urban areas,industrial zones, etc., which enable investors to make investment selections and decisions.

At present, the Common Law on Investment 2005 stipulates five sectors that are forbidden to all investors,nine sectors conditional to all investors and 14 sectors conditional to foreign investors (Appendix 1). Inaddition, for foreign investors conditional investment sectors also include those under the internationalcommitment schedule stipulated in the international agreements endorsed by Vietnam. To invest inconditional sectors, investors have to satisfy certain requirements for company establishment, project scope,domestic/foreign ownership structure and legal organization. Besides forbidden and conditionalinvestment sectors, foreign investors may make unrestricted investments in other sectors and areas.

Investment forms

During the early years of implementing the foreign investment promotion policies, Vietnam onlyallowed three main investment forms: joint venture, 100 per cent foreign investment and businesscooperation contract (BCC) 26, with priority given to BCC. In addition, the old law stipulated that FIEs

22 For example the municipal government of Danang City refused the FDI project on steel production as they were afraid of possiblenegative impacts on local environment.

23 For example when there are too many projects in one sector, leading to supply surplus or unreasonable competition, the governmentmay issue a banning order or temporarily stop issuing licenses for that sector for a certain period.

24 The US-Vietnam Bilateral Trade Agreement was signed in 2002, effective on January 1, 2003.

25 Decree 108/ND-CP of the government on September 22, 2006 regarding regulations and guidance for the implementation ofseveral articles of the Common Law on Investment 2005.

26 A BCC is a partnership signed by two or more parties with the objective of conducting jointly one or more business operations inVietnam, on the basis of mutual allocation or responsibilities and sharing of profits or losses, without creating or forming a legalentity in Vietnam.



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were only permitted in the form of a limited liability company and there was no regulation on indirectinvestment. This restriction on investment forms troubled the operation of FIEs, especially limiting thecapital mobilization of foreign investors in business activities.

The Common Law on Investment 2005 added more investment forms, such as the expansion of directand indirect investment. Foreign investors are allowed to acquire, merge, sign BCCs, contribute capitalor buy company shares. In addition, foreign investors are allowed to establish enterprises and registermore than one business sector under a legal entity similar to that of domestic investors, that is to saythey are allowed to establish their enterprises under any form of limited liability company, partnership,joint stock company or sole ownership; and allowed to make indirect investment by purchasing bondsand stocks or investing via securities investment funds and financial intermediaries. FIEs alreadyestablished in Vietnam that have new investment projects can apply for a permit to implement suchprojects without establishing a new business entity. Moreover, to further simplify the administrativeprocedures and enhance the transparency of the investment laws, the Government of Vietnam hasdeveloped lists of projects calling for foreign investment for individual periods to create favourableconditions for investors to select investment forms and project sizes in Vietnam.27

Investment registration procedures and investment incentives certificate

The Common Law on Investment 2005 unified and thereby simplified the investment proceduresapplicable to both domestic and foreign investors. Instead of “applying” for investment permits likebefore, foreign investors can now “register” for investment certificates applicable to projects capitalizedat less than VND 300 billion (ca. $18.8 million) that are on the list of conditional investment sectorsor the list of projects that are subject to the Prime Minister’s approval (project group i, Table 1).Investment projects capitalized at more than VND 300 billion or on the list of conditional investmentsectors (project group ii, Table 1) must go through the investment verification step. However, there aredifferent investment procedures for domestic and foreign investors for projects capitalized at less thanVND 15 billion (less than ca. $1 million) and on the list of projects subject to the Prime Minister’sapproval. For these projects, domestic investors, but not foreign ones, do not have to register theirinvestments.

Investment incentives entitlement procedures are stipulated more simply under the new Law onInvestment. Investors do not have to apply for a separate investment incentives certificate. Instead,investment incentives entitlements are included in the investment certificate. Under current regulations,the granting of investment certificates is decentralized to local authorities, such as the People’sCommittees of provinces and cities under central authority and Management Boards of industrialparks/export processing zones, excluding BOT (Build-Operate-Transfer), BTO (Build-Transfer-Operate) and BT (Build-Transfer) projects for which the Ministry of Planning and Investment (MPI)will grant investment permits.28 However, during the investment project verification, local authoritiesshould consult central government agencies such as MPI and related ministries for their appraisal asstipulated by laws before issuing an investment certificate. Hence, by establishing simpler and morereasonable procedures, the new Common Law on Investment has contributed to the transparency of theinvestment environment in Vietnam.

27 This list clearly defines criteria of project size, investment forms, investment locations, etc., and usually under the master planningof a certain industry or province.

28 According to Decree 78/2007/ND-CP, investment certificates for these projects are granted by MPI, not by local authorities.



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Table 1: Summary of investment registration procedures under the Common Law on Investment 2005

Project group Project type Project Size

Less than VND VND 15 billion Greater than 15 billion to less than VND 300 billion

VND 300 billion

i) From the list of conditional investment sectors Domestic No registration Investment Investmentand the list of projects subject to the Prime registration verificationMinister’s approval

Foreign Investment Investment Investment registration registration verification

ii) On the list of conditional investment sectors and Domestic Investment Investment Investment the list of projects subject to the Prime Minister’s and foreign verification verification verificationapproval(*)

(*) – See Appendix 1.

Source: Foreign Investment Agency, MPI29

Right to business of foreign investors

The Common Law on Investment 2005 has removed restrictions on the investment rights of foreigninvestors compared with those of domestic investors as stipulated in previous laws, such as the right toaccess and use credit sources, land and natural resources; the right to hire and employ people; the rightto direct export and import; and compulsory localization proportion. Previous regulations on theminimum capital contribution of foreign investors in joint ventures, and the proportion of legal capitalover investment capital were removed, creating more capital mobilization opportunities for investors. Interms of employment, while foreign employers previously had to go through a domestic recruitmentagency to hire domestic labourers, they are now legally allowed to recruit labourers directly. Restrictionson foreign investors due to a fixed export ratio and no export delegation were entirely removed anddomestic and foreign investors have an equal right to do business. However, the Common Law onInvestment 2005 and current regulations, including international commitments, still have differentprovisions on the right to invest for domestic and foreign investors. For example, in some service sectors(such as finance and banking), foreign investment is restricted by limited foreign ownership in sharepurchase transactions. Hence, for certain businesses, foreign investors should refer to other professionallaws like the Code of Labor, the Law on Insurance, the Law on Banking and Credit Organizations, etc.

Governance of FDI activities

National-level governance of FDI activities was initially assigned to the State Committee onCooperation and Investment (SCCI). This agency was then moved to the Ministry of Planning andInvestment. In the mid-1990s, the Central Management Board of Industrial Parks and ExportProcessing Zones was established to govern FIEs operating in industrial parks and export processingzones. Both the Ministry of Planning and Investment and the central Management Board of industrialparks and export processing zones previously had their branches at the local level. In 2003, the CentralManagement Board of Industrial Parks and Export Processing Zones was merged with the Ministry ofPlanning and Investment to unify national-level governance over FDI. However, these two agencies’local branches still operate separately and both belong to provincial People’s Committees.

29 See more at www.fia.mpi.gov.vn



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In recent years, Vietnam has gradually decentralized FDI governance functions to local authorities andindustrial parks and export processing zone management boards. While all previous FDI projects shouldawait approval by central agencies (government or Ministry of Planning and Investment) to get investmentpermits, current FDI projects that are not on the list of forbidden or restricted investment sectors asstipulated in the Common Law on Investment 2005 should apply to either of the following agencies:

■ People’s committees of provinces and cities under central authority: allowed to receive applicationsand grant investment certificates for FDI projects operating in provincial/municipal areasoutside industrial parks or export processing zones; projects on developing industrial parks andexport processing zones; and projects operating in industrial parks and export processing zonesthat have not been managed by any management board, including projects already approved bythe Prime Minister.

■ Management boards of industrial parks and export processing zones: allowed to receive applicationsand grant investment certificates for FDI projects operating within industrial parks, exportprocessing zones or economic zones, including projects already approved by the Prime Minister.

Such FDI decentralization is aimed at creating favourable conditions for investors, and at the same timeenhancing the accountability of local government agencies in FDI governance. To ensure efficientdecentralization requires some essential conditions: governance capacity and analytical skills of localgovernment officers, close cooperation and information exchange between central and local agencies,sustained central monitoring and investigation over local authorities, for example. However theseprerequisites have not been assured. The poor governance capacity of local provinces, resulting in lowproductive decentralization and other arising problems, and the lack of comprehensive master plans ofboth sectoral development and regional development are resulting in an ineffective decentralizationprocess and other arising problems.

2.2 Overview of investment incentives in Vietnam

Like other countries, Vietnam has issued a number of investment incentives to mobilize all availableresources for economic growth and sustainable development. Before the Common Law on Investment2005 came into effect, the investment incentives policy framework was spread across various laws andby-law documents due to the discrimination between domestic and FIEs. This troubled governmentagencies responsible for managing investment incentives as well as enterprises themselves responsible forunderstanding and applying for such investment incentives. Moreover, some investment incentivesserved objectives that sometimes conflicted with each other, resulting in unexpected outcomes. Forexample some incentives were aimed at attracting both high capital value and a high number of jobs;encouraging both export and import substitution; encouraging both economic development in difficultareas and the use of advanced technology and technology transfer.30

Complexity was further exacerbated when local authorities continued issuing specific incentives whichwent beyond the incentives framework issued by the government (a practice referred to as “fence-breaking”), leading to unhealthy competition in investment attraction31 (see Box 1). International

30 http://vietnamnet.vn/wto/tuaz/2004/02/52681/

31 In 2005, an investigation by Ministry of Finance showed that 33/48 provincial or municipal authorities issued investment incentivesviolating general regulations, which were mainly incentives on corporate income tax and land issues. In addition provincialauthorities also applied other preferential policies such as investment reward, quick depreciation, prolonged tax exemption duration,etc. See Vu et al. (2007) for further details.



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experience showed that investment incentives, while necessary for attracting more investment, are notnecessarily sufficient for attracting foreign investors.32 Meanwhile such “fence-breaking” competitionamong provinces in terms of investment incentives levels may lead to a “race to the bottom”, putting afurther strain on already low local budgets.33 The “fence-breaking” behaviour was explained by anumber of local authorities as the local “hunger for investment capital” due to the shortage of localbudget to meet development spending demands. These localities are mainly poor provinces, especiallythose located in difficult regions in terms of natural conditions and infrastructure quality to attractprivate investment. In addition, this issue also raised a request for the government to review itsinvestment incentives to make them more practical.

Box 1: Case study of “fence breaking” in investment incentives in local provinces

Although the Government has issued a common investment policy, 33 provincial and municipal authorities, dueto their local interests, continued “fence breaking” by issuing a series of specific incentives to attract investors.According to a review by the Ministry of Finance in 2005, these provinces used their local state budget to supportenterprises investing in local industrial parks by re-granting corporate income tax (CIT),Value Added Tax (VAT), landrent, investment supports, etc.

Eighteen provinces had unsuitable provisions on their budgets; 21 provinces had stipulations “beyond theframework” of land policy; 11 provinces had unsuitable provisions on corporate income tax incentives (manyprovinces had unsuitable provisions on both areas). Most of provinces had very high incentive for land tax,increasing the tax reduction period to 10–20 years. For instance, Ben Tre province stipulated that:“In addition to theentitlement of incentives stipulated by the Government, BOT, BTO and BT projects are entitled to the corporateincome tax exemption of another four years and 50 per cent reduction for the following nine years. Quang Namprovince applied the tax rate of 3–10 per cent lower than that of the government in three years. Ha Tinh provinceincreased the land rent exemption period to 7–13 years; increased the land rent reduction period to five years orthe whole project “life.” Phu Yen province daringly stipulated that: At the end of the exemption and reductionperiod stipulated by the Government, investors are entitled to 50 per cent land rent value for 8–20 years. Nghe Anprovince increased the land rent period to ten years for projects investing in Vinh City, Cua Lo township, andexempted another 20 years of land rent for projects investing in the delta area.Vinh Phuc province exempted 100per cent land tax for projects investing in difficult areas.”

Source: Consolidated by authors from newspapers issued from June to August 2005.

The Common Law on Investment 2005, enacted together with the Prime Minister’s Decision1387/QD-TTg on December 29, 2005 stopped local investment “fence breaking” and removedinvestment discrimination between domestic enterprises and FIEs. According to the Common Law onInvestment 2005, investment incentives are identified by two criteria: investment location andinvestment sectors. The law categorizes investment locations into two groups: locations with difficultsocio-economic conditions and locations with extremely difficult socio-economic conditions. The Lawalso categorizes investment sector into two groups: sectors with incentives and sectors with specialincentives.34 However, the Common Law on Investment 2005 does not specify clear investmentincentive levels that are stipulated in other corresponding professional laws in terms of tax, land, exportand import issues and other regulations.35 Table 2 summarizes specific incentives for taxes and other

32 Blomström (2002).

33 Vu (2006).

34 See Appendix 2 (a and b): List of investment incentive sectors and locations according to the Law on Investment (2005).

35 Such as the Law on Land, Law on Export and Import Duties, Law on Corporate Income Tax, etc.



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government investment support for investment projects satisfying those conditions.36 Clearly, thetransparency in investment incentives as per current regulations has helped reduce the previous “fencebreaking” situation in provinces.

It is important to note that investment incentive schemes indicated in Table 2 are applied after 2006.Before that time, different tax investment incentives were set for foreign and domestic firms. In thefollowing section we will describe in detail the tax incentive scheme applied before 2006 for the miningand quarrying sector (Section 5.2.)

In addition to tax incentives and investment support policies, investors are also entitled to legal“incentives” via the simplification of certain administrative procedures. In recent years, a number ofefforts have been made by the Government and government agencies in investment governance, such astransparency in investment application and permit granting, a “one door, one stamp” policy, publicationof industry and locality development planning, issuance of a list of projects calling for foreign investmentfor each period, establishment of taskforce groups on the implementation of the Law on Enterprises andthe Law on Investment, establishment of FDI promotion centres in three regions, regular dialoguesbetween the government and foreign investors, etc. These efforts have facilitated access to informationabout investment policies in Vietnam for investors and enabled them to better forecast developments inthe sector where they intend to make investment.

In terms of investment incentives, the Common Law on Investment 2005 and related legal documentshave had more positive provisions than those in the former Law on Foreign Investment and the Law onDomestic Investment Promotion. However, the Common Law on Investment 2005 is still a “framinglaw” that needs other guiding documents issued by related ministries (this is usually very time-consuming). To date, Vietnam has not had sufficient by-law documents with clear and consistentprovisions on the criteria of projects entitled to investment incentives. This is hampering the consistentimplementation of investment incentives stipulated by law. In reality the implementation of this law inrecent years showed that the identification of a project entitled to investment incentives was challengingand even differed among authorities. For example, the lack of a concrete explanation or guidelines inapplying investment incentives in preferential sectors (Annex 2a) has resulted in the various localauthorities interpreting the law differently. As a result, a project can be entitled to investment incentivesif located in one province, but not if located in another province with similar socio-economicconditions.

36 This means an enterprise may have various projects entitled to investment incentives (see also GTZ-CIEM, 2007).



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Table 2: Summary of current investment incentives

Types of investment Under list of incentive sectors Under list of incentive locations

incentives Sectors with Sectors with Locations with extremely Locations with difficult special incentives incentives difficult socio- economic socio- economic

(List A) (List B) conditions (Location 1) conditions (Location 2)

I.Tax incentives

1.Corporate income tax: Standard corporate income tax rate applicable to projects outside the incentive sectors and locations: 28%

1.1. Exemption and reduction of corporate income tax for:

Newly - established Four-year tax exemption Two-year tax exemption Four-year tax exemption Two-year tax exemption business entity for new starting from the first starting from the first starting from the first starting from the first investment project. profit-making year, 50% tax profit-making year, 50% tax profit-making year, 50% tax profit-making year, 50% tax

reduction for the next reduction for the next reduction for the next reduction for the next six nine years three years. nine years. years.

Three-year tax exemption starting from the first profit-making year, 50% tax reduction for the next seven years when investing in incentive sectors (List B) and operating in incentive locations (location 2).

Resettlement business Two-year tax exemption, 50% tax reduction for the next two years for a business entity Two year tax exemption entity moving out of urban areas due to land planning (common application). starting from the first

profit-making year, 50% tax reduction for the next six years.

1.2. Corporate income tax rate for:

Newly- established 10% tax rate in 15 years. 15–20% tax rate in 10% tax rate in 15 years 15–20% tax rate in business entity for new If having special impacts 10–12 years 10–12 years.investment project. over the economy, tax rate

of 10% is applied to the whole project’s life.(Decided by the Prime Minister)

Ongoing business entity Allowed to transfer losses to coming years, deductible to taxable income for a maximum of five years (common application)

2.Value added tax Tax rate of 0% for some sectors, including science and technology activities

3. Export - import duties Exemption of import duties Exemption of import duties in five years for import of in five years for import of project’s fixed assets. project’s fixed assets.

4. Natural resource royalty Maximum of 50% reduction of natural resource royalty in three years starting from the first year of exploitation

5. Land use tax Exemption of land use tax in 15 years maximum Exemption of land use tax Exemption of land use taxin 15 years in 7–11 years

II. Investment support

1.Technology transfer Contribution by technology in investment projects; support technology innovation by the National Technology Innovation Fund

2.Training support The government encourages and supports investors to establish a training support fund; the training support fund is not-for-profit; entitled to tax exemption and reduction as stipulated in tax laws; training cost of the business entity will be recorded in reasonable cost items for calculating taxable corporate income.

3. Development A number of support types: investment consultancy, management consultancy, technology transfer, market information investment support supply, participation in organizations and associations, investment promotion, etc.and investment services

4. Support for State budget to be used to support infrastructure developers and other supportive policies.infrastructure development inside and outside industrial parks/export processing zones

5. Custom clearance Foreign investors/experts and their dependants are granted multi-entry visas for a maximum of five-year period per support issuance.

Source: Consolidated by the authors from laws and related legal documents.



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2.3 Bilateral and regional investment treaties and negotiations

Right after opening the economy to foreign investment, Vietnam signed a number of investment-relatedbilateral and multilateral agreements. As of September 2007, Vietnam signed 50 bilateral agreements oninvestment promotion and protection. In addition, Vietnam has signed dual tax avoidance agreementswith 49 countries and territories. Among the signed bilateral agreements, the Bilateral Trade Agreementbetween Vietnam and the U. S. (2002) is a special trade agreement, whereby provisions for directinvestment are stipulated separately in one chapter and act as a foundation for later bilateral andmultilateral commitments for Vietnam. Regarding multilateral agreements, as an Association ofSoutheast Asian Nations (ASEAN) member since 1996, Vietnam has endorsed several investment-related agreements within the ASEAN framework such as the ASEAN Agreement on InvestmentPromotion and Protection, the ASEAN Framework Agreement on Services, and the FrameworkAgreement on ASEAN Investment Area. Vietnam has also been an active member in the negotiation ofa new ASEAN Comprehensive Investment Agreement (ACIA).

Vietnam’s accession to the World Trade Organization (WTO) in 2006 has impacted FDI policiesthrough four WTO agreements, namely: (1) the Agreement on Subsidies and Countervailing Measures(SCM); (2) the Agreement on Trade-related Investment Measures (TRIMS); (3) the General Agreementon Trade in Services (GATS); and (4) the Agreement on Trade-related Aspects of Intellectual PropertyRights (TRIPS). In general, WTO accession commitments reflect in the most comprehensive mannerVietnam’s commitments to WTO member countries. Vietnam has to conduct three types ofcommitments within the WTO framework, including commitments for trade in goods, commitmentsfor trade in services and commitments for the legal framework related to trade and other WTOregulations. Among these three commitment groups, each has a different impact on the attraction andrealization of foreign direct investment in Vietnam.

Commitments on goods

Generally, Vietnam was willing to comply with all binding WTO agreements and regulations at the timeof accession. However, due to its low development level, Vietnam requested and was granted atransitional period37 to fulfil several commitments relating to import duties, special consumption tax,non-agriculture subsidies and right to do business.

Vietnam proposed commitments for export and import duties, tariff barriers and agriculture and non-agriculture subsidies on goods. Regarding import duties, Vietnam committed to reduce the average tariffrate from the 17.4 per cent in 2008 to 13.4 per cent in 5–7 years (by 2014). Meanwhile, they committedto reducing the tariff rate for agriculture products from 23.5 per cent to 20.9 per cent, and industrialproducts from 16.8 per cent to 12.6 per cent. The tariff cut commitments will have direct impacts onprevious highly-protected investment areas (import-substitution industries such as automobiles,motorbikes, cement and steel) or strong exporting industries such as footwear, leather, garments andelectronics. Both areas have the participation of FIEs, especially protected ones.

37 At the WTO accession time, Vietnam was considered as a non-market economy and the allowed transitional period was 12 yearsbefore December 31, 2018. The “non-market” regime is only meaningful in anti-dumping lawsuits and WTO members are notallowed to apply special self-protection mechanisms to export goods from Vietnam.



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Commitments on services

WTO commitments on services go beyond those of bilateral trade agreements (BTAs) but not much.For almost all service industries, including sensitive ones such insurance, logistics or tourism, Vietnamstill keeps the level of commitment similar to that in the BTAs. Vietnam required further steps fortelecommunication, banking and securities commitments but, generally, they were not too far from thecurrent status and all of them suited the development directions that were approved for these industries.

Vietnam has commitments for eleven service sectors (110 sub-sectors), in which commitments on theright to penetrate markets of foreign investors vary in scope among industries. For some service types,Vietnam limits the ownership ratio of foreign service providers in Vietnam. For a limited number ofservices in which the foreign partners may immediately hold 100 per cent or majority ownership, theratio of foreign ownership will be gradually increased to reach 100 per cent after several years. Generally,common commitments for service industries are similar to those of the BTAs. At first, foreign companiesare not allowed to have commercial representation in Vietnam in the form of branches, unlesspermission is granted by the Vietnamese government for individual industries, which are very scarce. Inaddition, although foreign companies are allowed to send their managers to work in Vietnam, at least20 per cent of their managers should be Vietnamese.

Commitments on the legal framework

Vietnam agreed to comply with WTO provisions for commitments on the legal framework relating toinvestment and trade, however, as a developing country, Vietnam is entitled to a certain transitionalperiod. Relating to foreign direct investment, laws such as the Law on Investment, Law on IntellectualProperty Rights and Law on Enterprises are generally compatible with WTO regulations. Thiscommitment has an impact on the overall business environment and creates a momentum for thegovernment to continue its economic reform towards market direction, with special focus ontransparency and equal treatment among enterprises.

In summary, the bilateral and regional agreements Vietnam has currently signed do not contain specificprovisions about investment incentives, though there are several provisions to facilitate the investmentprocess through, for example, simplifying administrative procedures, establishing one-stop investmentcentres, promoting the dissemination of investment information, etc. The main aims of these provisionsare to promote the investment flows into a country. In contrast, there have not been specific provisionsthat require investors to respect minimum standards in i) protecting public morals and maintainingpublic order; ii) protecting human, animal, or plant life or health; or iii) complying with national lawsor regulations.

3 Overview of the Mining and Quarrying Industry andRelated Investment Incentives in Vietnam

3.1 Overview of development and investment policies in the mining andquarrying industry

The mining and quarrying industry plays an important role in the national economy of Vietnam,especially when Vietnam is promoting its industrialization and modernization. The industrialproduction value of the industry accounted for 11.2 per cent of the total industrial production value in



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2005.38 Vietnam has a natural advantage of approximately 60 categories of diversified and rich minerals.However, minerals in Vietnam have not been exploited and used efficiently. The three mineral categoriesof crude oil, natural gas and coal have accounted for 90 per cent exploitation output, but just 5.75 percent of GDP.39 Sparse investment, modest investment size, infrastructure shortages, poor miningequipment, outdated mining technology and low production efficiency due to a high rate of mineralloss in extraction (50 percent) are all considered basic causes hampering the development of the miningand quarrying industry.40 In recent years, the growth rate of the mining and quarrying industry hasshown a tendency to decrease, even experiencing negative growth rates in 2006 and 2007 (Table 3).

Table 3: Role and development trends in the mining and quarrying sector within the Vietnamese industry (2000–2007)

2000 2001 2002 2003 2004 2005 2006 2007e

Growth rate of industrial production value ( percent) – 1994’s comparative price

Whole industry 17.5 14.6 14.8 16.8 16.6 17.1 17 17.1

In which

Mining and quarrying 11.2 6.4 4.2 8 14.4 2.4 -1.6 -2.4

Coal 15.5 13.9 18.4 15.7 28.8 28.6 13.6 10

Crude oil and natural gas 10.5 4.5 0.2 5.5 13 -3.5 -7.1 -5.8

Metal ores 9.2 14.1 17.7 22.7 35.8 1.8 30.7 -10.5

Other rock mining 14.5 19 26.8 18.3 6.8 13.3 9.7 -1and quarrying

Sector structure by industrial production value ( percent) – current price

Whole industry 100 100 100 100 100 100 100 100

In which

Mining and quarrying 15.7 13.2 12.8 13.5 12.8 11.2 10.3

Coal 1.2 1.2 1.4 1.3 1.5 1.6 1.6

Crude oil and natural gas 13.5 10.9 10.3 11.1 10.4 8.7 7.8

Metal ores 0.1 0.1 0.1 0.1 0.2 0.1 0.2

Other rock mining 0.9 0.9 1 1 0.7 0.8 0.7and quarrying

Source: Consolidated by the authors from annual Statistic Year Books (GSO, multiple years).

According to current regulations, all minerals within the territory of Vietnam’s mainland, islands, seaterritories and marine platform belong to Vietnamese people and are governed by the State.41 Henceexploitation activities have long been dominated by state-owned enterprises (SOEs) which account formore than half of the total number of enterprises in this sector. However oil exploitation was openedvery early to the first foreign investor—the Vietso Petrol joint venture between Vietnam and the formerSoviet Union—which began in the early 1980s, before the enactment of the Law on Foreign Investment.According to the survey on enterprises conducted by the General Statistic Office, as of 2006 the numberof enterprises in the mining and quarrying sector was 1,370—only one per cent of the total number ofenterprises nationwide—but attracted 180,000 workers, or 2.7 per cent of the total number of workersin Vietnamese enterprises.

38 GSO (2007).

39 Wu (2007).

40 For example, mineral loss rates during the exploitation of mines is 40%–60%, appetite: 26%–43%; metal ores 15%–30%;construction materials 15%–20%; and oil 50%–60%. Source: “Viê.t Nam: Tô

?

n thât khai thác tài nguyên quá cao!” (“Vietnam: Highmineral losses in exploitation”) Retrieved December 2008: www.vnn.vn/khoahoc/vande/2004/09/258742/

41 Article 1, Law on Vietnam Mineral Resources.



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The development and investment policies of the mining and quarrying industry were mentioned inexamination, exploitation and processing planning for individual minerals, provisions of the Law onVietnam Mineral Resources (enacted in 1996 and amended in 2005), the Law on Petroleum (2008) andother related professional laws. Article 5 of the Law on Vietnam Mineral Resources (amended in 2005)stipulates that the State shall be in charge of basic planning and geological investigation of minerals.These plans are usually approved by the Government for a period of 10 to 15 years with major guidelinesfor investigation, exploitation and processing of individual types of minerals, clearly identifying a list ofexpected projects for the whole planning period.

To date, the Government of Vietnam has approved the master plans of investigation, exploitation andprocessing of the most popular types of minerals in Vietnam, such as crude oil, coal, iron, chromium,manganese, lead, zinc, bauxite and titanium, up to 2010, and their vision extends to 2020 and 2025.At present, a number of master plans for other mineral sources (such as fluorite, gemstones, rare earths,silica sand and silver) have not been approved. It is more time-consuming to get verification andapproval for investment applications in other minerals that have not yet been approved for master plans.This can be troublesome for foreign investors who are looking for investment opportunities in thissector. Moreover the quality of overall planning in Vietnam is not high, usually far from the actualdemand and development of the industry, leading to rapid adjustments shortly after implementation.For instance, the overall coal planning that was approved in 2003 for the 2003–2010 period, with aneye to 2020, had to be replaced by another version in 2008 because the targets set out in the plan werenot practical: The 2003 approved plan forecast that the coal exploitation output in 2010 would be23–24 million tonnes, while the actual coal exploitation output in 2007 was 41.2 million tonnes—1.7times higher than the forecast figure for 2010.

The Law on Foreign Investment in 1987 opened the door for foreign investors to be involved in miningand quarrying activities. The main objectives of attracting foreign investment in this sector were to i)mobilize a large capital source into this huge capital-intensive sector; ii) attract advanced technology toexploit minerals efficiently, reducing the current drain in mineral exploitation; and iii) promote thetransfer of foreign advanced technology, forming a pool of highly-skilled managers and workers in themining and quarrying industry (i.e., spillover effect). However, as this is a non-renewable resourceexploitation area, according to the Common Law on Investment 2005 and other professional laws, themining and quarrying industry is not an investment-promoted sector, but a conditional one (Appendix1). Investment projects in this sector (including mineral investigations, exploitation and processing),regardless of size, must be subject to the Prime Minister’s approval.

As of early 2008, Vietnam has attracted 305 FDI projects in mining and quarrying that were grantedinvestment licenses with a total registered capital of $8.4 billion, or 9.9 per cent of the total registeredFDI capital for the whole period of 1988–2007. FDI investment in mining and quarrying reached itspeak in the 1996–2000 period in terms of registered capital and number of projects, then plunged inthe 2001–2005 period, but quickly recovered in the last three years. The reasons for the dramatic dropof FDI in this sector during the period 2001–2005 were the impact of the regional financial crisis in thelate-1990s and the enactment of several natural resource management regulations that required theinvestigation of new investment projects in the sector. However, FDI inflow in the mining andquarrying sector increased in 2006 and 2007. The registered FDI capital in this sector suddenly shot upto 2.5 times higher than the previous five year period of 2001–2005 (Figure 3).

According to the list of projects calling for foreign investment for the five-year period of 2006–2010,FDI capital attracted in mining and quarrying industry is expected to be $4.5 billion, two thirds of the



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total FDI capital invested in the mining and quarrying industry in the previous 18 years. Joint venturesdominated with 43 per cent of total registered capital, followed by business cooperation contracts with39.2 percent, while 100 per cent foreign investment only accounted for 15.9 percent. Although FDIprojects have been allowed to establish themselves in the form of joint stock companies since 2006 whenthe Common Law on Investment 2005 took effect, five new joint stock company projects have beenregistered, accounting for 1.8 per cent of the total registered FDI capital of the 1988–2007 period.

Figure 3: FDI trends in the mining and quarrying industry (1988–2007)

Source: Foreign Investment Agency (MPI, 2008)

The five major investors in mining and quarrying included Taiwan, Japan, Great Britain, theNetherlands and Singapore, accounting for more than half of registered FDI capital in this sector duringthe last 20 years. While projects from Taiwan and Singapore focused on non-metallic minerals, thosefrom the Great Britain, Japan and the Netherlands concentrated on oil exploitation. In terms of mineralcategories, FDI capital was mainly poured into rock and non-metallics exploitation, accounting for 55per cent of the total registered capital and 63 per cent of the total number of projects in the mining andquarrying sector; followed by oil exploitation with respective proportions of 40 per cent and 21 per cent.The remaining capital was divided quite equitably into the remaining two categories: coal and oreexploitation (two per cent) and metallics and precious stone exploitation (three per cent) (see Figure 4).

Figure 4: FDI composition in the mining and quarrying industry by category

Source: Consolidated from data provided by the Foreign Investment Agency (MPI, 2008).



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FDI projects in the mining and quarrying sector were concentrated in 49 provinces and cities andoffshore within the sea territories of Vietnam. Projects located offshore accounted for 39 per cent of thetotal capital and 20 per cent of the number of FDI projects in the mining and quarrying sector, mainlyoil investigation and exploitation. The following provinces also attracted a portion of FDI investment:Thanh Hoa (7.8 per cent); Quang Ninh (6.9 per cent); Binh Du’o’ng (6.5 per cent); Hai Phong (5.8percent); Kien Giang (5.3 per cent); Ninh Binh (4.3 per cent); Hai Duong (3.5 per cent); Ba ria-VungTau (3.4 per cent); Dong Nai (2.8 per cent).

This analysis shows that, despite the decreasing proportion of the mining and quarrying sector in the overallindustry due to the strong growth of the processing sector in recent years, mining and quarrying still play acrucial role in Vietnam’s current and projected economic development strategy, especially in ensuring energysecurity and serving the national industrialization cause. The challenge for Vietnam is to clearly define a planfor the exploitation and use of this non-renewable natural resource in a sustainable way, avoiding itsexhaustion and assuring its availability for future generations. In addition, it is essential to strengthen thestate governance of the exploitation of natural resources to ensure that enterprises in this sector will complywith related regulations, exploiting this natural resource with efficiency-oriented thinking and minimizingnegative influences on the environment due to the exploitation and use of natural resources.

3.2 Investment incentives in the mining and quarrying industry

As mentioned above, the mining and quarrying industry is categorized as a conditional investmentsector. Hence, projects in this sector, in principle, are subject to strict government scrutiny primarilybecause Vietnam wants to restrict the exhausting exploitation of national natural resources, to preventharming future sustainable development. In most cases, under the current regulations, investors in thissector are subject to several additional taxes, such as a natural resource royalty, environment tax/fee,deposit for exploitation rights and higher corporate income tax rate, among others. However due to highnatural resource rents and rather low natural resource royalties, investors, especially foreign ones,continue to show strong interest in this sector.

Although mining and quarrying itself is not an investment promoted sector, according to the Law onNatural Resources (amended in 2005) the government still provides certain investment incentives formineral exploitation projects linked with on-site processing in locations with difficult or extremelydifficult socio-economic conditions (Annex 2b); projects with advanced technology or techniques,environmental protection, maximum recovery of useful substances, production of metals, alloy or otherproducts with high socio-economic value and efficiency; and projects developed to process importedminerals to meet domestic and export demands.42 Clearly, investors in this sector are still able to enjoyseveral investment incentives if their projects satisfy one out of four conditions: (i) they are located in aninvestment incentive location; (ii) they are located in an industrial park, export processing zone oreconomic zone; (iii) they use advanced technology and modern techniques in exploitation; and (iv) theyuse a large number of workers (more than 500 workers). Once satisfying one of those four conditions,investors will be entitled to several of the following investment incentives:

Corporate income tax:

Currently, mining and quarrying firms that fall into the investment incentives sectors are exempt fromcorporate income tax during the first 2 to 4 operating years (Table 2). However, incentives on corporate

42 Article 5, section 3: Amended Law on Mineral Resources (2005).



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income tax are not applicable to the investigation and exploitation of oil and precious minerals. In thiscase investors have to pay the corporate income tax at 32 to 50 per cent depending on projects.43

In addition enterprises are entitled to other incentives stipulated in the Law on Corporate Income Tax, suchas covering losses incurred during the tax exemption period by income incurred after (or before) that period;

Export-import duties44

Enterprises in the mining and quarrying industry are exempted from import duties if:

■ Imported goods are used for petroleum-related activities, including:

a) Equipment, machinery, spare parts, specialized vehicles for petroleum-related activities

b) Essential materials for petroleum-related activities that cannot be manufactured domestically;

■ Imported goods for direct use in scientific research and technology development, includingmachinery, equipment, accessories, transport vehicles unable to be manufactured domestically,and technology unable to be created domestically;

■ Imported materials, accessories, spare parts for the production of projects on the list of sectorswith special incentives or the list of locations with extremely difficult socio-economic conditionsare exempted from import duties for five years starting from the first date of production.

Value added tax45

Technology transfer and the export of non-processing natural resources and minerals are not subject tothis tax.

Natural resource royalty46

Enterprises with mineral exploitation projects (excluding petroleum) entitled to investment incentivesare subject to a maximum of 50 per cent royalty reduction in the first three years, starting from the firstdate of exploitation. Common regulations on royalties for exploitation of petroleum and metals asstipulated in the Law on Petroleum and the Law on Mineral Resources include:

■ Crude oil: Six to 25 per cent depending on contracts and calculated by actual exploitationoutput during the taxable period for individual petroleum contracts;

■ Natural gas: Zero to 10 per cent depending on individual contracts;

■ Petroleum investigation and exploitation activities are subject to an income tax rate of 50 percent over taxable income during the taxable period.

In special cases, the Government of Vietnam may consider the exemption or reduction of these taxes.

43 Law on Corporate Income Tax (2008), which takes effect on January 1, 2009.

44 Law on Export and Import Duties (2005).

45 Law on Value Added Tax in 2008.

46 Law on Tax on Mineral Resources in 1998.

Personal income tax47

A 50 per cent personal income tax reduction for persons with taxable income, including Vietnamese andforeigners working in economic zones. In addition, the laws also stipulate that organizations andindividuals contributing capital by patents or technology are exempted from income tax for thatcontribution value.

Land use tax, land use rent: The government assures that enterprises are permitted to rent and use landfor mineral investigation and exploitation for a maximum period of 70 years depending on projectlocation and size. Incentives for land rent exemption and reduction will be decided by ManagementBoards of industrial parks or export processing zones or provincial People’s Committees in accordancewith the land quotation stipulated by the government. Procedures for land application and rent approvalare subject to the Law on Land 2003.

Technology transfer48

Enterprises with technology transfer activities are entitled to a series of tax or credit incentives.Specifically, they can access the national Technology Innovation Fund, or enjoy corporate income taxexemptions (to a maximum of 50 per cent of total investment for technology innovation) in 4 to 9 yearsdepending on types of technology and technology-receiving locations.

In addition to those incentives, promoted enterprises are entitled to accelerated depreciation; incentiveson investment and reinvestment; reduction of social security contribution; deduction of taxable incomedepending on the number of workers or other labour-related costs; and a 10 per cent retention of theirannual taxable corporate income for the establishment of company’s science and technologydevelopment fund. Moreover, investors can enjoy the investment support policies of central and localgovernments as well as legal incentives (such as administrative procedures, land planning, land clearancesupport, etc.) as presented in the overview section above.

3.3 Trade-related investment measures in the mining and quarryingindustry

Generally, the agreements on investment promotion and protection between Vietnam and othercountries are framework agreements, stipulating non-discrimination principles for domestic and foreigninvestors in committed areas, but not specific investment incentives. In addition these agreements alsolimit discriminative subsidies. Regarding the mining and quarrying industry, Vietnam still keeps someprovisional exclusions other than those in agreements signed between Vietnam and some othercountries. Specifically:

■ Agreement on investment promotion and protection between Vietnam and the UnitedKingdom: This agreement applies the most favoured nation status and non-discriminationprinciple between investors of the two countries, except in some industries, including petroleumexploitation;

47 Law on Corporate Income Tax in 2007 and Law on Technology Transfer in 2006.

48 Law on Technology Transfer (2006).



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■ Agreement on investment promotion and protection between Vietnam and Australia: Thetwo sides will give each other the most favoured nation status in export-import licence issuance,as well as in issues relating to custom tax, and other taxes and fees imposed on or related toexport and import goods in prioritized cooperation areas, including the energy and mining andquarrying industries.

■ Agreement on investment freedom, promotion and protection between Vietnam and Japan:The two sides stipulate that there is no discrimination between investors of the two countries,except for 31 identified areas (for Vietnam), including the investigation and exploitation ofpetroleum and precious minerals. However the two nations have committed to equal treatment,which is not less favourable than any treatments provided to investors of any third country andtheir investment, within a similar context of investment activities.

■ Bilateral Trade Agreement between Vietnam and the U.S.: In terms of mineral investigationand exploitation, Vietnam still has the right to keep exceptions for the application of mostfavoured nation status for investors in this sector. In addition, Vietnam also has some otherrestrictive requirements. For example, investment projects in some industries, such as cement,bricks, etc., have to export at least 80 per cent of their products and the U.S. investors have tocontribute at least 30 per cent of the legal capital in joint ventures unless permitted by Vietnamcompetent agencies.

In terms of government subsidies and support, the Government of Vietnam reserves the rightto provide subsidies and support for domestic investors (including land grants, preferentialcredit or other support forms) without providing the like to U.S. investors.

■ WTO commitments: There is no restriction on the right to business in the mining andquarrying industry, but there are some restrictions on petroleum-related activities. Specifically:(i) suitability with the petroleum development plan, or subject to the Prime Minister’s approvalif outside of the plan; (ii) establishment of joint venture with the foreign share of 49 per centmaximum; after three years from the date of WTO accession, 51 per cent maximum; and thefollowing two years, permitted to establish 100 per cent foreign enterprise; and (iii) environmentprotection compliance.

In terms of commitments on the import tax rate in this industry, generally current tax rates are suitablewith WTO requirements with the average rate of zero to five percent, except in the cement sector. Thisdemonstrates the direction of Vietnam in the focus on sustainable development rather than exhaustiveexploitation of domestic natural resources by concentrating on the import of external natural resources.

4 Impacts of Investment Incentives on Decisions ofForeign Investors: The mining and quarrying industry

Recent studies analyzing the impacts of investment incentives on decisions of foreign investors showeddifferent views.49 Some studies concluded that, provided that other factors such as the political-economic environment, infrastructure quality or production cost, are the same, investment incentives

49 For example, studies by Morisse and Pirnia (1999); Thomas (2007); OECD (2003); Schwartz, Pelzman and Keren (2008).



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played a crucial role in directing investors to make decisions about investing in that nation. Howeverwhen adding other factors (controlled factors) to the study, the result showed that investment incentiveswere not the decisive factor, by themselves, to direct foreign investors to invest in a nation. In reality,investor preferences in the form of tax exemptions and reductions, or capital support, are all financingitems. Many economists believe that developing countries are applying excessive investment incentivesthat may lead to a “state budget spending burden” for the government, and which may not ensure anincreased FDI inflow. If government financing is not sufficient to compensate for losses/costs borne byinvestors due to unfavourable infrastructure or investment environments, it is certain that suchinvestment incentives are not attractive enough for foreign investors who always seek opportunities tomaximize their return on investment.

To investigate the views and opinions of investors regarding investment incentives in Vietnam, theresearch team sent questionnaires to several FIEs in the mining and quarrying industry. Of 41 FIEscontacted, 10 enterprises (accounting for 24 percent) responded (Table 14), all of whom started theiroperation before 2000 with the average operation time in Vietnam being 14.8 years. That means thatthe investment incentives they enjoyed (if any) were under the framework of the Law on ForeignInvestment and other related laws before the enactment of the Common Law on Investment 2005. Thequestionnaire was followed up with more in-depth interviews.

Table 4: Structure of FIEs surveyed for the study

Sub-sectors of mining and quarrying Per cent of FIEs in the sub-sectorReceived questionnaires Responded

Total 100 % 100 %

Petroleum and gas 29.3 % 30 %

Coal 4.9 % 10 %

Metals 17.1 % 20 %

Non-Metals 48.8 % 40 %

Total of FIEs 41 10

Source: The authors’ small survey of FIEs in mining and quarrying for the study.

As mentioned above, before the Common Law on Investment 2005 took effect, investment incentivesfor foreign and domestic enterprises in Vietnam were considerably different. For example, the standardcorporate income tax (CIT) applicable to domestic enterprises was 32 per cent, while that for foreigninvestors was 25 per cent. Foreign projects that are entitled to incentives of CIT rates may even beentitled to a tax rate lower than the standard CIT rate applied to foreigners, in some cases as low as 10to 20 per cent depending on project location. In addition, foreign investors were entitled to otherincentives such as the tax exemptions for the import of machinery or materials that cannot be produceddomestically; personal income tax exemptions up to 50 per cent; reduction of land rent and no tax onland-use right transfer, among others.

Among respondents, six enterprises are joint ventures, two are 100 per cent foreign-owned; and two arebusiness cooperation contracts (BCC). While enterprises operating in petroleum exploitation export100 per cent and enterprises in coal sector export over 80 per cent of exploited output, those inconstruction material exploitation mainly serve the domestic market.

Although the respondents were not many in number or representative of FDI projects operating in themining and quarrying industry, information gathered from answered questionnaires partly reflected theviews of investors on investment incentives in Vietnam. Through information provided by FIEs, the researchteam was able to draw some conclusions on the role of investment incentives for enterprises as follows:



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■ According to the respondents, investment incentives and Vietnam’s legal environment wereconsidered to be the two most important factors affecting the investment decisions of foreigninvestors, which were scored at an average of 4.7 and 4.6 points respectively by investors (Figure5). When being interviewed, the investors explained that they highly appreciated investmentincentives because investment in mineral exploitation projects required huge capital and wassubject to high risk levels, which made the support of the host government a crucial factor toinvestors. In addition, the clear and transparent legal framework for investment in the hostcountry was seen as another important factor for investors’ decisions.

Figure 5: Investors’ assessment of factors influencing their investment decisions (Scoring: 1 = unimportant; 5 = veryimportant)


■ Although the mining and quarrying industry is not one of Vietnam’s investment incentivesectors, FIEs operating in this sector stated that the Government of Vietnam had providedincentives in one way or another. Specifically, they were entitled to incentives by various criteria,such as being located in difficult locations, using advanced technology and employing manyworkers. Enterprises (8/10 respondents) explained that they received incentives on taxes, mainlycorporate income tax (5/8 respondents), followed by land use tax (3/8 respondents), exportimport duties (2/8 respondents). Only two enterprises were entitled to preferential credit andtraining support, and two other enterprises enjoyed support on industrial park infrastructure.

■ Enterprises that received incentives said that tax incentives were the most meaningful for them (withthe average score of 4.75 out of five). Meanwhile, supportive incentives (on credit, training,investment services, infrastructure of industrial parks, administrative services, etc.) were not highlyappreciated by enterprises in the mining and quarrying industry (with an average score of 1.6 forsubsidies and 1.75 for other forms of support, including infrastructure) (Table 5). This situationcould be explained as follows: i) although the government issued subsidies for enterprises in termsof credit, training, research and development, etc., in reality these policies rarely came into existence.Enterprises found it difficult to access these subsidies due to complicated application procedures,unattractive support, and high transaction cost to get the incentives;50 and ii) in terms of size, taxincentives, especially reduced corporate income tax, have much higher value than other incentives.

50 This has been confirmed by many recent studies such as the study on “policies to encourage enterprises to invest in technologyinnovation” by CIEM in 2007, study on “Experimental Research on CIT incentives for domestic enterprises” by VCCI (2004).



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■ Most enterprises agreed that investment incentives applied by the Government of Vietnam toforeign investors were more attractive than those applied in other countries where they hadinvestment projects (7/10 respondents). However 5/7 enterprises said that they would still invest inVietnam if there were no such incentives because of low natural resource royalty and labour costs.Meanwhile, enterprises would be less likely to invest in Vietnam in the absence of incentives wherethe projects are located in difficult locations and they would not be able to make a profit withoutgovernment subsidies and investment incentives. This result is in line with research conducted bythe Vietnam Chamber of Commerce and Industry (VCCI) and United States Agency forInternational Development (USAID) (2004) on the impacts of tax incentives on 140 Vietnameseenterprises. According to this study, nearly 85 per cent of enterprises receiving corporate income taxincentives said that they had invested and would continue to invest irrespective of whether theyreceived incentives on corporate income tax or not.51 Obviously, foreign investors have to calculatethe economic efficiency of their invested capital when they invest in a country. Thus, once the legaland the business environments in Vietnam have improved significantly, government investmentincentives are the crucial factor, but not the decisive factor in their investment decisions.

Table 5: Significance level of investment incentives for enterprises in the mining and quarrying industry (Scoring: 1 =unimportant; 5 = very important)

Type of incentives Significance of incentives Average Number of (weighted) response

Tax incentives Corporate income tax: 5 4.75 12

Asset tax: 5

Export import duties: 5

Land-use right tax, property tax: 4.3

Subsidies Cash: 1 1.6 6

Preferential credit: 1

Training: 2.5

Research and development: 1

Others Industrial park: 2 1.75 5

Administrative services: 1

Others: 1


■ In order to be eligible for incentives, 8/10 respondents reported that they had made commitmentsto the local governments in some areas when implementing their investment projects. Table 6illustrates the allocation of these commitments by economic, social and environmental issues. Themost popular commitment type is environmental commitment in the form of EnvironmentImpact Assessment (EIA) reports (7/8 respondents). This is due to the fact that under the Law onEnvironmental Protection of Vietnam (enacted in 1993 and amended in 2005), mining andquarrying and other industries that might impact the environment are required to complete EIAreports before project approval. Commitments on the use of local labour when the project cameinto operation were also signed by many enterprises with the local authorities (6/8 respondents).In addition, some enterprises (5/8) also made commitments to contribute to local development(such as contribution to social works, funds for the poor, charity fund, studying promotion funds,etc.). However, commitments relating to the spillover effect of FDI on the economy (for instancevia technology transfer, management skill training or networking with domestic enterprises) do notseem to have been of concern to local governments.

51 See more on the research report of VCCI (2004).



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Table 6: Sustainable development commitments between enterprises and local governments

Enterprise commitments Number of respondents

Economic - Technology transfer 4

- Export ratio 2

- Use of domestic materials 1

Social - Use of local labour 6

- Contribution for local development 5

Environmental - EIA report 7

- Environment deposit 3

Total number of respondents 8


Such information shows that the use of performance commitments relating to economic, socialand environmental issues has been used by local governments to direct investors to sustainabledevelopment, especially for large projects with potential economic, social and environmentalimpacts in specific localities and country-wide. However, whether the application of thesemeasures was efficient or not depended on the extent to which enterprises honoured thesecommitments as well as compliance monitoring by local governments. When asked, enterprisessaid that when they came into operation, the local authorities may have checked thecommitment compliance of enterprises once or twice. Nevertheless, the sanctions for non-compliance were not serious. There were a number of reasons explaining this situation,including that current regulations for administrative punishment have been light; enterprisesmay have various excuses for their non-compliance, such as lack of financial resources or locallabour unable to meet working requirements; and the examination and monitoring of localgovernments were not regular.

5 Analysis of the Impact of Investment Incentives for FIEsin the Mining and Quarrying Industry on SustainableDevelopment

As mentioned in Sections 2 and 3 of this study, Vietnam’s investment attraction and incentive policies ingeneral, and for FDI in particular, have generally aimed first at mobilizing capital. However since 2000,especially after the enactment of the Common Law on Investment 2005, the FDI mobilization policy ingeneral, and capital mobilization in the mining and quarrying industry in particular, have been moresustainability-oriented, specifically in encouraging investment in advanced technology sectors, inenvironment protection and in difficult areas to create leverage for the economic development of such areas.

Nevertheless, Vietnam also applies some policies to restrict investment in some special sectors thatimpact political social security, natural resources and the environment, including mining and quarrying.Notably, the policy on directing investors to sustainable development is not only reflected in theinvestment policy framework stipulated in the Common Law on Investment 2005, but dependent onother legal provisions in professional laws such as the Law on Environmental Protection, the LaborCode, the Law on Social Insurance, the Ordinance on Natural Resource Royalty, the Law on Minerals,the Law on Petroleum, among others. These laws and their guiding documents have specific provisionson the economic, social and environmental responsibilities of enterprises. For example, the Labor Code(enacted in 1993, amended in 2002, 2006 and 2007) has provisions for the rights and responsibilities



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of employers to employees on such issues as the labour contract system, the salary system, operation ofsocial organizations, working conditions for employees, vocational training and labour disputesettlement. This law is applicable to all types of organizations operating in Vietnam, including FIEs.

The Law on Environmental Protection (enacted in 1993 and amended in 2005) clearly stipulates theresponsibilities of enterprises for environment protection, ranging from investment preparation andimplementation, to production and sales. The Law requires enterprises to comply with environmentalstandards during their production and take necessary measures to minimize negative effects on theenvironment, with specific and strict sanctions for violations.

The Ordinance on Natural Resource Royalty (enacted in 1992 and amended in 1998) stipulates thatdomestic and foreign organizations and individuals that undertake natural resource exploitationactivities within Vietnam’s territory have to pay natural resource royalties as stipulated by law. Accordingto this ordinance, natural resource exploitation activities subject to royalty payment include theexploitation of metallic and non-metallic minerals, crude oil, natural gas, natural forestry products,natural aquatic products and other natural resources, whereby natural resource royalties paid byenterprises are determined by the product of actual taxable exploited commercial product output andthe royalty rate. Table 7 provides a comparison of royalty rates across some mineral commodities appliedby selected countries and shows that the royalty rates of Vietnam are currently quite low compared withthose in other countries in the region.

Table 7: Comparison of Vietnamese royalty rates with other selected countries in Asia-Pacific (percent)

Country Gold Crude Oil Natural gas Coal Iron ore Copper

AUSTRALIA 2–15 6–20 6–20 7.5 2–7.5 5–7.5

CHINA 4 n.a. n.a. 1-3 2 2

INDONESIA 2 n.a. n.a. 13.5 2.5 2.5

MALAYSIA n.a. 10 n.a. n.a. n.a. n.a.

PHILIPPINES 2 n.a. n.a. n.a. 2 2

RUSSIA 6 15–30 4 4.8 8

VIETNAM 2–6 6–25 0–10 1–3 1–5 1–5

Source: Ordinance on Natural Resource Royalty (1998) for Vietnam’s figures and http://treasury.gov.za/divisions/epifr/tax/mprb/notes.pdf for other countries’ figures.

The Law on Minerals of Vietnam (1996) stipulates that enterprises with mineral exploitation activitiesmust follow provisions of the Law on Environmental Protection to minimize negative effects on theenvironment and undertake restoration of the environment, ecology and soil after completing each stageor all mineral-related activities. Moreover, enterprises have to hold a balance at a Vietnamese bank—ora foreign bank permitted to operate in Vietnam—as insurance against damage to the environment. Stateagencies can use these funds to repair any damage to the environment caused by the companies’ actions.They are responsible for the improvement, upgrading, overhaul and construction of new infrastructureconsistent with approved feasibility studies on mineral exploitation and processing.

The Law on Petroleum (1993, amended in 2008) also stipulates that enterprises involved in petroleumexploitation must submit environmental protection plans that include pollution prevention, eliminationof pollution risks and resolution of damages due to environmental pollution events.



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5.1 Sustainable development determinants of FIEs

Sustainable development has been discussed in general all over the world and in Vietnam for manydecades. While the concept of sustainable development for enterprises has long been a topic explored bymany countries and international organizations, only within the last couple of years has the topic cometo the fore in Vietnam. According to the International Institute for Sustainable Development and theWorld Council for Sustainable Development, “sustainable development at enterprises level is thatenterprises apply their strategy and action plan to satisfy the current demands of the enterprises andother stakeholders, and at the same time, protect, maintain and improve the human resources andnatural resources for the future.”52 This definition basically reflects the core nature of the concept ofsustainable development, as proposed by the World Commission on Environment and Development in1987. In addition, this definition clarifies that the development of enterprises does not only satisfy thedemand of the enterprises themselves but also harmonizes it with the demands of stakeholders such ascreditors, clients (customers), employees, suppliers and social communities—those who are directlyaffected by the operation of the enterprises at various levels. With this sustainable developmentbehaviour, the enterprises will ensure the simultaneous achievement of three objectives—the three pillarsof sustainable development: sustainable growth, social welfare and environmental protection.

The analysis in Section 4 shows that, for FIEs in the mining and quarrying industry, although currentgovernment investment incentives play a crucial role, they are not the only factor influencing theinvestment decisions of foreign investors in Vietnam. This also shows that, although the mining andquarrying industry is not an investment-promoted sector, many investors still seek Vietnameseinvestment opportunities in this area. However, after making an investment decision in Vietnam, notall FIEs will follow the sustainable development dimension as mentioned above. According to a numberof published studies, the sustainable development behaviour of enterprises is determined by variousfactors, such as the awareness of managers and employees or the policy of the parent company. Inaddition, external factors may influence sustainable development behaviour of enterprises, such ascustomer demand, the legal system, the effectiveness of the legal system or community pressure.

To evaluate the factors’ impacts on sustainable development in enterprises within this study’s framework,the research team selected some key factors and then asked firms for their own assessment. Factorsselected for examination included: the existence of the legal system (social and environmental standardsand regulations); the effectiveness of legal regulations; local incentives to enterprises53; the sustainabledevelopment strategy and policy of the mother company; the product market; and community pressure.

Responses from enterprises showed that there were three important factors influencing the sustainabledevelopment behaviour of enterprises: i) the policy of the parent company (average score 4.5); ii) currentlegal framework; and iii) legal enforcement (both have the same average score: 4.4). Among factors selectedfor examination, enterprises had the least appreciation for local incentives to enterprises with 3.7, showingthat this was not the most important factor influencing the sustainable behaviour of FIEs (Figure 6).Implications for Vietnam’s policies arose when they found that FIEs were influenced by legal andinstitutional factors in the host countries as well as the policies of their parent companies. To encourage FIEsto operate and develop sustainably, governments at all levels should focus on improving the current legalsystem and, more importantly, ensuring the effectiveness of that system. Government incentives may be alsoimportant, but should not be relied about too much to affect the sustainable behaviour of enterprises.

52 IISD and WBCSD (n.d.), p.1.

53 These could even be beyond the national regulated investment incentives as mentioned in Box 1, Section 2 of this report. Forexample, in order to get incentives, the FIEs are requested by local government to recruit local employees or contribute someinfrastructure for social facilities.

Figure 6: Enterprise assessment of factors influencing their sustainability-oriented behaviour (Scale: 1 = unimportant; 5 =very important)


5.2 The impacts of FDI on sustainable development in the mining andquarrying industry54

In this section, the research team used the data from the annual enterprise surveys of the GeneralStatistical Office during the 2001–2006 period to analyze the impacts of FIEs in the mining andquarrying industry on sustainable development. According to the survey data, the mining and quarryingindustry has developed significantly in terms of the number of enterprises and the number of jobsduring the 2001–2006 period: the number of enterprises increased 2.2-fold, while the number of jobsincreased 1.4-fold. Compared to FIEs in other sectors, the number of enterprises in the mining andquarrying industry and the number of jobs increased 1.4 and 1.3 times faster than the averagerespectively.

Table 8: Number of enterprises and employees as taken from the General Statistical Office surveys (2001–2006)

2001 2002 2003 2004 2005 2006

Total number of enterprises 51,680 62,908 72,012 91,756 112,950 131,318nationwide

In which FIEs 2,011 2,308 2,641 3,156 3,697 4,220

Total number of enterprises in 634 879 1,029 1,193 1,277 1,369mining and quarrying industry

In which FIEs 15 13 14 19 20 21

Total number of employees 3,933.2 4,657.8 5,175.1 5,770.2 6,237.4 6,715.2(000 employees)

In which employees in FIEs 489.3 691.1 860.3 1,044.9 1,220.6 1,445.4

Total number of employees in 129 155.5 162.7 165.8 175.2 180.2the mining and quarrying industry (000 employees)

In which employees in FIEs 6.5 7.2 7.7 7.6 8.2 8.7

Source: The enterprise surveys (2001–2006, GSO).

54 Unless otherwise noted, illustrative tables and figures in this section are based on the data from the enterprise surveys of the GeneralStatistical Office.



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The small number of FIEs in the mining and quarrying industry within the survey sample of theGeneral Statistical Office compared to the number of registered FDI projects overall can be explainedas follows: i) before 2001, the mining and quarrying industry was not open to foreign investors, whichlimited the number of registered FIEs in this sector; ii) many FDI projects were just registered and havenot come into operation, therefore, they were not covered by the GSO survey;55 and iii) the GSO surveysample did not cover all FIEs operating in the mining and quarrying industry.

Within this study framework, the research team used the following factors to analyze the sustainabledevelopment impacts of FDI in the mining and quarrying industry:

■ The impact on economically sustainable development was tested through the following factors:growth, productivity, level of used technology, annual additional investment, tax contributionto the state;

■ The impact on socially sustainable development was tested through the following factors:employee income, number of mobilized employees, professional and vocational training foremployees; operation of social organizations; and enterprise’s contribution to the community;

The impact on environmentally sustainable development was tested through the following factors:environment protection activities of enterprises, enterprise’s investment in environment protection.

FDI and the economically sustainable development of enterprises

Despite a very small proportion in the mining and quarrying industry in terms of the number ofenterprises and the number of employees (1.5 per cent and 4.8 per cent respectively, in 2006), FIEs hada significant contribution on the industry’s turnover. Specifically, while in 2001 FIEs contributed up to36.4 per cent of the total turnover of the industry, in 2004 this figure was 40.8 per cent and in 2006, itincreased to 42.9 per cent. This showed that the production scale and growth rate of FIEs were muchhigher than those of domestic enterprises (see Figure 7).

Figure 7: Turnover of enterprises in mining and quarrying industry (2001–2006)

Source: GSO’s enterprise surveys

55 Many projects, especially those which fell into the investment verification group and/or did not fall into the planning, had a longperiod of preparation so as to officially come into operation.



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The productivity (calculated by turnover divided by employees) of FIEs in the mining and quarryingindustry was several times higher than that of domestic enterprises during the 2001–2006 period. In thisperiod, although domestic enterprises continuously improved their productivity, FIEs still demonstratedtheir outstanding performance (Figure 8). If considering the performance efficiency of enterprises by theaverage profit before tax per employee, the picture was also similar. FIEs had a profit, before tax, about19 times higher than that of domestic enterprises in the 2001–2006 period. Clearly the FDImobilization in the mining and quarrying industry has contributed considerably to the improvement ofthe industry performance in the last years.

Figure 8: Productivity comparison between FDI and domestic enterprises (million VND/employees)

Source: GSO’s enterprise surveys

As mentioned above, one of the objectives of attracting FDI in the mining and quarrying industry was toencourage FIEs to use advanced technology in their projects. According to the enterprise survey in 2001,56

42.9 per cent of FIEs used modern technology and 50 per cent of them used medium technology. Therespective ratios of domestic enterprises were 5.3 per cent and 72.9 per cent. This shows that although theproportion of FIEs using modern technology was much higher than that of domestic enterprises, many FIEsonly transferred the medium technology to Vietnam. However, it is also noted that the application ofmodern technology in a country requires the human resources to have certain level of skills and knowledgeto master such technology. In the case of Vietnam, the limited human resources with acceptable skills andknowledge may be one of the barriers to the application of modern technology by FIEs in the country.

Generally, enterprises in the mining and quarrying industry made new investments during the reportedyear, accounting for 69 per cent of the total number of enterprises in 2001, 59 per cent in 2004, and61 per cent in 2006. This demonstrated the relatively stable development of enterprises in this sector.Notably, the average additional investment per FDI enterprise within a year was always many timeshigher than that of domestic enterprises (up to 15 times), reflecting the outstanding financial capacityof FIEs. This was again confirmed by enterprise surveys in 2004 and 2006 when the realized investmentcapital57 of FIEs in the mining and quarrying industry was even higher than the charter capital58 (Figure9). Obviously, the ratio of realized investment capital over the charter capital of FIEs in the mining and

56 Only the enterprise survey in 2001 had questions about the technology level of enterprises.

57 Realized (or implemented or sometimes called disbursed) capital refers to capital actually implemented by the investor through theproject implementation. This is different from committed (or registered) capital, which is capital the investor registered withauthorities from the beginning of the project. In practice, realized capital is usually less than committed capital.

58 Charter capital refers to the capital shareholders (investors) have committed to contribute for a certain period of time. This figureshould be recorded in the company’s charter (statutes).



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quarrying industry was very high, about 106 per cent higher than the average ratio of 94.9 per cent ofFIEs in industry sector and 81.4 per cent of FIEs in general.59

In Vietnam, one of the factors utilized to assess the contribution of FIEs to the economy is their tax (andother tax-related) contribution to the State budget. From the data of the enterprise surveys in 2001, 2004and 2006, the research team calculated the tax contribution of these enterprises60 to the State budget incomparison with firm’s profit before tax. The result was quite interesting, as FIEs had a much smaller levelof contribution than did domestic enterprises. While domestic enterprises had to pay on average 15–20 percent of total profit before tax, FIEs only paid the average rate of 9–10 per cent of profit before tax. There areseveral reasons for this discrepancy: i) total profit before tax of domestic enterprises were much lower thanthat of FIEs in the sector; ii) their contribution to the State budget was higher in absolute term; iii) asmentioned in previous sections of the study, FIEs operating in the mining and quarrying industry may enjoytax incentives as stipulated by law. Especially before 2000, these incentives were usually higher than those fordomestic enterprises. In fact, FIEs in the mining and quarrying industry who were interviewed in enterprisesurveys conducted by the General Statistical Office were established 8–17 years ago (i.e., before 2005), whenthere was a differentiation of investment incentives between FIEs and domestic enterprises. This result maydiffer for enterprises starting their business under the Law on Enterprises 2005, in which both domestic andforeign enterprises operate under a single legal and policy framework.

Figure 9: Comparison of charter capital and realized capital of FIEs in the mining and quarrying industry (million VND)

Source: GSO’s enterprise surveys (GSO, 2004, 2006)

To identify the size of incentives on corporate income tax reserved for FIEs in the mining and quarryingindustry, the research team estimated the value of incentives provided by the State to FIEs throughcorporate income tax incentives. The estimation method is as follows:

■ Classify FIEs in the mining and quarrying industry into two groups: i) FIEs in the petroleumsub-sector and ii) FIEs in the other mining and quarrying sub-sectors. This classification followsthe law that was in effect at the time of the enterprise surveys, where the corporate income taxrate for enterprises in the petroleum sub-sector was 32 per cent, while that for FIEs in other non-oil sub-sectors is the standardized CIT rate for foreign investors at 25 per cent. The standardCIT rate applied to domestic firms at that time was 32 per cent.

59 Calculation by the research team from the data of the Foreign Investment Administration of the Ministry of Planning andInvestment.

60 Includes all kinds of taxes paid to the state budget by the firms according to law, including CIT, land rent transfer, VAT taxes, etc.



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■ Take the standard tax rate of 32 per cent for enterprises in the petroleum sub-sector, then applythis tax rate to FIEs in the petroleum sub-sector in the enterprise surveys to calculate the taxvalue that enterprises would have paid to the State budget. After that, compare the standard(minimum) CIT value that would have been paid with the actual CIR value paid to the state.The difference would be the CIT incentives enjoyed by FIEs in the petroleum sub-sector.

■ Similarly, take the standard corporate income tax rate of 25 per cent to apply for FIEs in theremaining mining and quarrying sub-sectors to then determine the CIT value which would havebeen paid by foreign investment law. After that, deduct from this amount the actual corporateincome tax value paid to the state budget to determine the corporate income tax incentivesenjoyed by FIEs.

■ The total investment incentive value enjoyed by foreign investors via the corporate income taxincentives in the whole mining and quarrying industry is determined as the aggregate ofcorporate income tax incentives enjoyed by enterprises in petroleum sub-sector and enterprisesin non-petroleum sub-sectors.

The formula to determine the corporate income tax incentive for FIEs in the mining and quarryingindustry can be expressed as follows:

In which:

■ INCIT = Total corporate income tax incentives enjoyed by FIEs in the mining and quarryingindustry;

■ STANDARDCITij = Standard corporate income tax rate of enterprise i in sub-sector j

■ REALCITij = Actual corporate income tax value paid by enterprise i in sub-sector j

■ i –FDI enterprise

■ j- = 1 if enterprise is in the petroleum sub-sector; = 2 if enterprise is in the non-petroleum sub-sector.

Table 9 presents the results of estimating the corporate income tax incentive value enjoyed by FIEs inthe mining and quarrying industry based on the enterprise surveys conducted by the General StatisticalOffice in the 2001–2006 period.61 Accordingly, the application of CIT incentives for FIEs in themining and quarrying industry resulted in revenue losses for the Government of Vietnam of least VND375.6 billion in 2001 (or $27 million), VND 1,552.6 billion in 2004 (or $98.7 million) and VND680.9 billion in 2006 (or $42.3 million) in forgone revenue. The highest loss in State budget incomearose from FIEs in the petroleum sub-sector, many times higher than the lost value from FIEs in thenon-petroleum sub-sectors.

61 Here, the research team assumed that enterprises faithfully paid their corporate income tax as stipulated by law. There were no taxavoidance or tax debts, although these situations still happened in practice.



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If we include in the above calculation the tax revenue loss as a result of a difference between standard CITrates applied for domestic enterprises (at 32 per cent) and foreign enterprises (25 per cent),62 the cost ofCIT incentives Vietnam paid to attract FIEs in the mining and quarrying sector would be slightly higherthan the above figures at VND 381 billion in 2001 (or $27.3 million); VND 1575.9 billion in 2004 (or$100.1 million) and VND 707.9 billion in 2006 (or $44 million). This cost accounts for between 0.5 and0.7 per cent of industrial turnover of this sector for the period 2001–2006. In addition, the state budgetwould also lose many sources of income if enterprises were entitled to other tax incentives such as export-import duties, land tax or preferential credit. Perhaps this is the price paid by Vietnam to implementincentives with the aim of attracting FDI. However, this amount may not be efficient when manyenterprises did not consider investment incentives a prerequisite for their decision to invest in Vietnam.

Table 9: Estimate of corporate income tax incentive value for FIEs in the mining and quarrying industry (billion VND)

Operation area 2001 2004 2006

Petroleum:

Non-incentive case 10,000 19,807.7 20,044.7

Actual corporate income tax paid 9,624.4 18,255.1 19,363.8

Incentive value 375.6 1,552.6 680.9

Non-petroleum:

Non-incentive case 5.5 29.9 33.9

Actual corporate income tax paid 1.5 13.1 14.4

Incentive value 4.0 16.8 19.5

Whole mining and quarrying industry

Non-incentive case 10,005.5 19,837.6 20,078.6

Actual corporate income tax paid 9,625.9 18,268.2 19,378.2

Incentive value 379.6 1,569.4 700.4

Source: Calculation of the authors’ from the GSO’s enterprise surveys (GSO, multiple years)

FDI and socially sustainable development

The average income of employees working in FIEs in the mining and quarrying industry was manytimes higher than that of employees of domestic enterprises, although the gap tended to decrease inrecent years (Figure 10). While in 2001, the average annual income of employees in FIEs was 4.7 timeshigher than that of employees in domestic enterprises, this difference shrank to 3.8 times in 2006. Inreality the number of employees mobilized by FIEs only accounted for nearly 5 per cent of the totalnumber of employees working in the whole mining and quarrying industry. Hence, only a small numberof labourers in the mining and quarrying sector had high income levels. This ratio was much lower thanthe number of employees of FIEs nationwide, demonstrating the small job creation effect of FIEs in themining and quarrying industry. (According to the enterprise survey in 2006, FDI employees accountedfor 21.5 per cent of the total number of employees in enterprises.)

Figure 10 also illustrates the sudden increase in employee income in both domestic and foreignenterprises in 2006, whereby the employee income doubled compared to that in 2004. Thisphenomenon could be explained by two adjustments of the minimum salary during the 2004–2006period. The first time was in 2005, from VND 290,000/month (or $20/month) to VND350,000/month (or $22/month); the second time was in 2006, from VND 350,000/month($22/month) to VND 450,000/month (or $28/month).

62 Similar to the method of tax revenue lost calculation by Fletcher (2002).



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Figure 10: Average employee income in the mining and quarrying industry (2001-2006) (million VND/year)

Source: GSO’s enterprise surveys (GSO, multiple years)

According to a short survey of enterprises, up to 82 per cent of FIEs in the mining and quarryingindustry established social organizations such as trade unions and women’s committees, whose efforts toprotect the labourers’ interests were greatly appreciated by enterprises. However, the contribution ofFIEs to social insurance, health care insurance and union fees was not much higher than that of domesticenterprises, and was even lower in certain years. For example, in 2004 FIEs only paid VND 1.2million/employee (or $76.2) for health care insurance, social insurance and union fee, compared toVND 1.5 million/employee (or $95.3) paid by domestic enterprises. In 2006, respective figures wereVND 2.4 million (or $149) and VND 2.6 million (or $161.5). This seems to conflict with the highincome of employees in FIEs as mentioned above.

One of reasons for this discrepancy was that FIEs seemed to focus on ensuring the current high incomelevel for employees, but were not interested in maintaining their future working ability and socialwelfare. This situation was reflected in a number of previous in-depth studies on welfare conditions ofemployees. Accordingly, FDI employers did not pay the social insurance premiums, and even“borrowed” employee social insurance premiums for many years.

One of factors demonstrating the sustainable development direction of enterprises is the availability ofvocational training activities, reflecting the enterprise’s concern about human resource development. Theenterprise surveys showed that only 10 per cent of FIEs in the mining and quarrying sector organizedtraining and capacity-building activities for their employees in the surveyed years. This situation wassimilar in domestic enterprises where the rate was even smaller at just five per cent. This showed thatVietnamese mining and quarrying enterprises in general, and FIEs in particular, have not paidconsiderable attention to the sustainable development of their human resources. The integration andstrong development elements of the mining and quarrying industry will make FIEs face the challengesof highly-skilled human resources, especially when the competition in the labour market in this sectorincreases. If there is a lack of appropriate investment in the development and improvement of skills foremployees of enterprises, enterprises will face difficulties in human resource mobilization, which couldnegatively influence their long-term development.

FDI and environmentally sustainable development

As mining and quarrying are activities with potentially significant impacts on the bio-environment,environmental protection by enterprises will be one of the crucial factors in helping them control



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possible negative impacts on the environment during their operation. Up to 90 per cent of FIEs inmining and quarrying sector that responded to our questionnaires said that they had already establisheda unit or had full-time staff on environmental protection. This is one of the key pieces of evidencereflecting the enterprise’s concern for environmental issues. Up to half of the ten FIEs said that they hadalready received the ISO 14000 or 14001 certificates, compared with 4/10 enterprises who received theISO 9000 certificates. This result is in line with the statistics that up to 90 per cent of enterprisesreceiving ISO 14000 certificates in Vietnam are foreign-owned.

Generally, FIEs and Vietnamese enterprises have not paid sufficient attention to investment in pollutiontreatment equipment. This was reflected in enterprise surveys in 2001, 2004 and 2006, when theproportion of FIEs with pollution treatment equipment/works was only 20 to 21 percent, although thiswas much higher than the rate of 8 per cent of domestic enterprises (Table 10). Similarly, the proportionof FIEs who have recurrent expenditures for environmental protection activities was also higher thanthat of domestic enterprises, although the number of FIEs with this type of recurrent expenditurestended to decrease over time, from 40 per cent to 19 per cent in five years. It was noted that in 2006the proportion of enterprises (both foreign and domestic) with pollution treatment equipment/workswas higher than that of enterprises with intra-year expenditures for environmental protection (logically,the number of enterprises with intra-year expenditures for environment protection should be higherthan that of enterprises with pollution treatment equipment/works). The reason for this could be that,although the enterprises had pollution treatment equipment, they did not run it frequently, resulting inthe lack of positive environmental results.

Only a very small number of FIEs that had annual expenditures for environmental protection activitiessaid that they had projects on pollution treatment, with the rate of 6.7 per cent in 2001, 5.3 per cent in2004 and 3.7 per cent in 2006. The rate of domestic enterprises was even lower, 4.8 percent, 2.1 percent and 2 per cent in respective years (Table 10). With the low proportion of enterprises investing inenvironmental protection projects, there were significant challenges for the inspection and supervisionof compliance with legal regulations on environment protection for Vietnamese enterprises, in general,and FIEs in the mining and quarrying industry in particular. Once enterprises do not have activitiesrelated specifically to environment protection, it cannot be assured that they will fully comply withenvironmental protection regulations and government standards, regardless of whether they are able toestablish their own units specialized in this area.

Table 10: Enterprise investment in environmental protection in the mining and quarrying industry

2001 2004 2006Domestic FIEs Domestic FIEs Domestic FIEs

enterprises enterprises enterprises

Proportion of enterprises with pollution 8.1% 20% 5.6% 21.1% 2.4% 21.0%treatment equipment/works

Proportion of enterprises with annual 11.9% 40% 7.3% 26.3% 2.0% 19%expenditures for environmental protection

The proportion of enterprises with intra-year 4.8% 6.7% 2.1% 5.3% 2.0% 3.7%expenditures for environmental protection

Source: GSO’s enterprise surveys (GSO, multiple years)

6 Conclusion and Policy Recommendations

This section of the report will begin with conclusions drawn from the analysis in the body of the report.The section will then focus on policy recommendations to improve investment incentives in Vietnamin the current context in order to make sure that these incentives aim at fulfilling the national



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development objectives and contribute to the sustainable development of enterprises. The last part ofthis section will point out some limitations of the research and make suggestions for follow-up research.

6.1 Main conclusions

■ As a developing country in the region, Vietnam has had impressive achievements in attractingforeign direct investment (FDI) in the last two decades. Vietnam has gradually improved their legalsystem and investment policies to create very favourable conditions for foreign investors incompliance with basic principles of international trade and investment, as they relate to agreementsof which Vietnam is a member (including the multilateral trade agreements of the World TradeOrganization). Although there remains room for further improvement, Vietnam’s investmentenvironment has attracted international organizations and foreign investors. Together with othercountries such as China and India, Vietnam has become a leading FDI destination.

■ Similar to other developing countries, Vietnam needs desperately to mobilize foreign capitalsources for current and future economic development. In order to attract FDI inflow in the lasttwo decades, Vietnam introduced a series of incentives for foreign investors, specifically tax,financing and investment services. However these incentives were not static, but graduallyadjusted and improved over time. Since 2005, investment support policies were largelyapplicable to both domestic and foreign investors. Core principles of investment promotionpolicies—including non-discrimination, transparency, forecastability, protection of investor’sownership and contract enforcement—have been integrated in Vietnam’s current legaldocuments and policy system. However, laws, regulations and policies have been onlysporadically enforced. Foreign investors are still faced with difficulties when implementing theirinvestment projects due to the delayed issuance of guiding documents, the inconsistency inpolicy implementation, and the frequent changes of current legal and policy system.

■ The mining and quarrying industry plays a significant role in the economy in general, and inthe industrial sector of Vietnam in particular. Although this sector requires thorough investmentverification by competent agencies upon the implementation of an investment project, it hasattracted considerable interest from foreign investors with 9.9 per cent of registered capital. Inaddition, foreign invested enterprises (FIEs) in this sector are entitled to investment incentivesthat are available for certain sectors and locations. However for a sector that has great impact onthe environment, current investment incentives seem to be divorced from the industry’s socialand environmental responsibilities. By law, projects are entitled to investment incentives if theyqualify for investment incentive sectors and/or locations, regardless of whether or not they areoriented toward sustainable development.

■ Most FIEs in this sector have enjoyed investment incentives provided by the Government ofVietnam in one way or another. Tax incentives, especially corporate income tax incentives, werethe most commonly exploited by enterprises. In addition, some enterprises also enjoyedpreferential credit or support for training activities or research and development. Among typesof investment incentives, most enterprises took advantage of tax incentives, which were mostlucrative in comparison with other incentives. However, investment incentives were consideredan important factor, but not a prerequisite, for the foreign investors’ decisions to invest inVietnam, or in the mining and quarrying sector in particular. In addition to investmentincentives, the equal and transparent investment environment and the enforcement of the legalsystem were also crucial factors for investors in their investment decision.



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■ Current government investment incentives are not a primary influence on FIEs’ sustainabledevelopment behaviour in the mining and quarrying industry, possibly because currentincentive tools have directed enterprises to investment-promoted sectors and locations, but havenot encouraged a relationship between incentives and the sustainable development behaviour ofenterprises. Although current laws already stipulate that the State must encourage enterprises tobe socially responsible and environmentally sustainable (for example, promotingenvironmentally-friendly attitudes, behaving in a socially responsible way to employees, etc.);these demands are not as enforced as others and do not necessarily lead to socially responsibleand sustainable behaviours. Until now, FIEs’ socially responsible behaviour toward employees,community and the environment have mainly depended on policies held by the parentcompany abroad, the perfection of the legal system and its enforcement. The result reflects whatgoes on in the larger, global community of multinational corporations: passive rather than activeroles on the part of enterprises when it comes to promoting and enforcing responsiblesustainable behaviour.

■ In terms of economic sustainability, FIEs in the mining and quarrying industry outperformeddomestic ones with such assessment indicators as productivity, technology level, increased stableinvestment capital and contribution to state budget. However the state budget losses due to taxincentives, especially corporate income tax incentives granted to enterprises, were not small: theyaccounted for between 0.5 and 0.7 per cent of total industrial turnover in the sector during theperiod 2001–2006. So the question was whether the incentives policies for enterprises, whichled to lost state revenue, were necessary when the foreign investors’ decision to invest in Vietnamwas not actually due to the incentive entitlement.

■ In terms of social sustainability, FIEs in the mining and quarrying industry have sought tomaintain a reasonably high income for their employees (much higher than that in domesticenterprises in the same sector). However, enterprises have not demonstrated active attention to thesocial welfare of their employees with regard to vocational training, health care insurance, socialinsurance, and contribution to trade unions and other social organizations. While enterprises seemto have passively followed legal regulations, they have not been actively expanding their socialresponsibility. Perhaps monthly income is currently regarded as the most important factor toemployees in Vietnamese enterprises, making them willing to accept lower quality workingconditions and less regard for their social welfare. However, as the labour market and economydevelop, enterprises must maintain an attractive social welfare policy to keep their employees, tobe able to compete with other enterprises in the same sector and to avoid negative impacts on theirproduction activity due to labour strikes (as happened recently in several FIEs in Vietnam).

■ In terms of environmental sustainability, mining and quarrying activity may potentially havenegative effects on the environment. Though Vietnam has issued a basic legal framework tolimit the negative impacts of industry operations on the environment, enterprises in Vietnam,and FIEs in particular, have not actively taken measures to prevent pollution during theirproduction process. Environmental protection activities by enterprises were mainly performedto satisfy current legal regulations, but did not demonstrate a proactive stance in environmentalprotection work. Despite the lack of information about industrial compliance withenvironmental protection standards and regulations, based on the analysis in this report, it isdifficult to conclude that FIEs have fully complied with environment protection regulations (forexample, they may make investments in environment protection, but do not run pollutiontreatment equipment, etc.).



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6.2 Policy recommendations

■ Experience has shown that, once the national investment environment improves and createsfavourable conditions for enterprises, and the legal system and investment policies have becometransparent, clear, equal and effective, investment incentives introduced by the government willnot be efficient in attracting both domestic and foreign investors. Although the favourableenterprise-oriented investment environment has evolved, the Government of Vietnam needs tofurther improve current policies so that the above-mentioned principles can be fullyincorporated in the legal system of the State from the central to local levels. More importantly,it is essential to ensure the rapid and consistent implementation of investment policies bycompetent government agencies.

■ For Vietnamese investment incentives to influence enterprises to promote sustainabledevelopment, the State can consider the link between sustainable development targets andconditions for incentive entitlement, especially social and environmental conditions. At present,although some laws have confirmed that the State encourages enterprises to develop sustainably,guiding documents on enterprise incentives have not been issued. Consequently, specificincentives for enterprises relating to sustainable development have only been appliedindividually depending on the local government’s level of awareness. During the negotiation,verification and approval of investment projects, government agencies should be aware of thesustainable development objectives of the whole economy, as well as those of enterprises, tocommunicate requirements for enterprises and force them to comply with legal regulations.

■ Post-investment inspection and monitoring should be further considered by governmentagencies to ensure that enterprises are honouring their commitments. For enterprises to developsustainably will not only depend on setting sustainable development targets for enterprises, butwill also rely on serious compliance with legal regulations by the corporations. Enterprisesshould be monitored and inspected frequently—with the participation of stakeholders such ascivil society organizations, research institutes and the public—to ensure they are complying withlegal regulations and commitments.

■ The public should be involved in monitoring the enterprises’ commitment to compliance.Investors should publish their intended commitments to protect the environment and makethem available for the social community. In addition, it would be beneficial to recognizecompanies that comply with or exceed their sustainable development goals. Rewarding sociallyresponsible behaviour with a prize or title creates positive publicity for both the company andthe concept of social responsibility.

■ Dialogue between the State and enterprise should increase so that both parties inform policyissues, exchange information and propose solutions to issues regarding sustainable developmentfor corporations. An increase in this dialogue in recent years between government agencies andthe business community reflects an active measure to create policy dialogues between the publicand the private sectors at the national and local levels. However, to make these activities reallyefficient, recommendations and questions from enterprises should be resolved or publiclyanswered by government agencies.

■ It is necessary to assess the efficiency of government incentives so as to make timely adjustmentsfor individual periods. A first step is to thoroughly reassess the efficiency of tax incentives forenterprises to make suitable adjustments on incentive duration, incentive tax rates, etc.



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■ The natural resource royalty system should encourage enterprises to conserve the non-renewablenatural resources of Vietnam. In a positive step forward, the Ministry of Finance intended tosubmit to the Standing Committee of the National Assembly a draft amendment of theResolution on the natural resource royalty framework, as stipulated in the Ordinance on NaturalResource Royalties (Box 2). The amendment suggested that royalty rates for some naturalresource categories be increased by 10 to 30 per cent. The increase in natural resource royaltiesfor minerals is expected to limit the abundant exploitation, as well as to increase local statebudget income to enable them financially to improve the environment and repair theinfrastructure surrounding the exploited areas. Simultaneously, with the higher royalty rate,enterprises will have to calculate the exploitation output to balance economics and efficiency,and to invest in intensive processing, which then helps protect the natural resources and enhancethe natural resource value.

Box 2: Proposed increase to natural resource royalty by the Ministry of Finance

The natural resource royalty rates for several minerals will increase to between 10 and 30 per cent, much higherthan the current rates of one to 10 per cent. The rates will remain unchanged for some natural resource groups.Specifically, the rates for some minerals may be adjusted as follows:

Exploitation activity Royalty rate ( per cent)

Current Proposed

Metal minerals 1 – 5 10 – 30

Non-metal minerals 1 – 5 5 – 10

Precious stones 3 – 8 5 – 20

Coal 1 – 3 5 – 20

Natural gas 0 – 10 6 – 25

Crude oil 6 – 25 6 – 25

According to the calculation by the Ministry of Finance: using the proposed royalty rates will significantly increase theroyalty for minerals: Mangan VND 30,000-75,000/tonne (currently VND 15,000/tonne); iron VND 30,000–75,000/tonne(currently VND 15,000/tonne); coal VND 20,000-80,000/tonne (currently VND 4,000–6,000/tonne).

Source: http://vietnamnet.vn/kinhte/2008/08/799574/ (Retrieved: August 19, 2008)

■ Vietnam’s existing bilateral and multilateral trade and investment agreements do not containspecific provisions to link investment and sustainable development. Specifically, they do notoutline investors’ obligations in ensuring that sustainable development policies are put in place.In the context of the ongoing investment agreement negotiation (i.e., ASEAN – plus;ASEAN–China, ASEAN–Korea, ASEAN–Japan, ASEAN–India, etc.), it is important thatVietnamese negotiators propose including relevant provisions on sustainable development in theagreement.

6.3 Notes and recommendations for further research

Despite research efforts and review of available information from interviews and enterprise surveys inVietnam, this study cannot avoid some limitations. Specifically:



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■ The analysis and comments from this study only reflect the situation of the impacts ofinvestment incentives on the decisions of foreign investors as well as on sustainable developmentwith regard to FIEs in a specific industry, namely mining and quarrying. As a result, commentsand conclusions may not represent the whole industrial sector or FIEs operating in Vietnam ingeneral. To assess the impacts of investment incentives, the research team believes that thereshould be a study on this topic at the national level based on the methodology used in this study.

■ FIEs interviewed or analyzed in this study were affected by investment incentives applied inVietnam before the implementation of the Common Law on Investment 2005. Consequently,this study reflects only the impacts of investment incentives on investment decisions andsustainable development in enterprises up to the year 2005, and does not reflect the impacts ofcurrent investment incentives. Assessing the impacts of current investment incentives onsustainable development in Vietnamese enterprises (as both domestic and foreign enterprisesnow operate on a single legal platform) requires more time for testing, perhaps after 4–5 years.

■ Due to time and budget limitations, the research team could not conduct a policy impact surveyon a larger scale, but relied on the enterprise surveys conducted by the General Statistical Office.This method may lead to certain limitations, for example, necessary information for asustainable development impact assessment was not reflected in the questionnaire of theenterprise survey. However, the team tried to compensate for the information shortage bysending supplemental questionnaires to several enterprises in the mining and quarryingindustry, with questions directly related to the research topic. Unfortunately, the number ofrespondents was too small to ensure appropriate statistical representation.

■ Based on the approach of this research, it is possible to expand the scope to the whole industrialsector or the whole economy. The impacts of investment incentives on sustainable developmentin Vietnamese enterprises can also be evaluated by using a quantitative method with the datafrom the enterprise surveys. However, assessment indicators and impact variables should besignificantly narrowed.



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Bibliography



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Appendix 1: List of sectors on which investment isconditional as applicable to foreign investors (Issued withDecree 108-2006-ND-CP of the Government, September22, 2006)

1. Broadcasting and television

2. Production, publishing and distribution of cultural products

3. Exploration and exploitation of minerals

4. Establishment of infrastructure for telecommunications network, transmission and provision ofinternet and telecommunications services

5. Establishment of the public postal network and provision of postal services and express services

6. Construction and operation of river ports, sea ports, terminals and airports

7. Transportation of goods and passengers by railway, airway, roadway and sea and inland waterways

8. Catching of aquaculture

9. Production of tobacco

10. Real estate

11. Import, export and distribution

12. Education and training

13. Hospitals and clinics

14. Other investment sectors in international treaties of which Vietnam is a member and that restrictthe opening of the market to foreign investors

Investment conditions applicable to foreign investors with investment projects in the sectors stipulatedin this Appendix must conform to the provisions in international treaties of which Vietnam is a member.



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Appendix 2a: List of domains entitled to investmentincentives

LIST A: Sectors with special investment incentives

I. Manufacture of new materials and production of new energy; manufacture of products ofhigh-technology, of bio-technology or of information technology; mechanical manufacturing

1. Production of composite, light construction materials, precious and rare materials

2. Production of high-quality steel, alloys, special metal, sponge iron and steel billet

3. Investment for construction of establishments using solar energy, wind energy, biogas,geothermic and tidal energy

4. Production of medical equipment for analytical and extractive technology in the medical sector;orthopaedic equipment, specialized vehicles and equipment for the disabled

5. Application of advanced technology, bio-technology for production of medicine for treatinghumans with international GMP standard; production of antibiotic materials

6. Production of computer, telecommunication equipment, Internet, targeted IT products

7. Production of semi-conductors and electronic components with advanced technology;production of software products, items of digital information; provision of services on software,research on technology information and training on human resources on technologyinformation

8. Production of and manufacture of precision mechanical engineering equipment; equipment andmachine for examination and control of industry manufacturing safety; industrial robots.

II. Breeding, rearing, growing and processing of agricultural, forest and aquaculture products;salt making; production of artificial strains, new plant varieties and livestock breeds

9. Forest plantation and carrying

10. Agriculture, forestry and fishery development in barren areas, unused water surface

11. Long-distance marine fishing

12. Production of strains, propagation and hybridization of new seeding plants and animals withhigh economic efficiency

13. Production, extraction and manufacture of salt



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III. Use of high technology and modern techniques; protection of the ecological environment;research, development and nursery of high technology

14. Application of high technology; application of technologies have not been used in Vietnam;application of bio technology

15. Pollution treatment and environmental protection; production of environmental pollutiontreatment, environmental monitoring and analyzing facilities/equipment

16. Collection, treatment of waste water, air, solid disposals; recycling and re-use of waste

17. High technology research and development (R&D) and development of incubators

IV. Labour-intensive industries

18. Project regularly employing from 5,000 employees or more

V. Construction and development of infrastructures

19. Investment in construction, providing infrastructure for industrial, export processing high tech.economic zones and other important investment projects under the decision of the PrimeMinister

VI. Development of education, training, health care, physical training, sports and national culture

20. Investment in construction of facilities for treatment of tobacco or drug addiction

21. Investment in establishment of facilities for epidemic control

22. Investment in establishment of geriatric centres or centres for rescue and care of the disabled andorphans

23. Investment in construction of training centres for improvement of and achievement in sports,training for the disabled; construction of sport facilities with apparatus and facilities satisfyingrequirements for organization of international tournaments.

VII. Other manufacturing and service sectors

24. Investment in research and development (R&D) accounting for 25 per cent or more turnover

25. Salvage operations at sea

26. Investment in the construction of apartment buildings for workers working in industrial zones,processing zones, hi-tech zones and economic zones; investment in the construction ofdormitories for students and construction of residential houses for people entitled to preferentialsocial treatment



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LIST B: Sectors with investment incentives

I. Manufacture of new materials and production of new energy; manufacture of high technology,bio-technology or information technology; mechanical manufacturing

1. Production of soundproof, electrically insulated or high-heat insulated materials; syntheticmaterials used as a substitute for wood; fire-proof materials; construction plastics; glass fibre;special-use cement

2. Production of non-ferrous metals and refining of cast iron

3. Production of moulds and prototypes for metal and non-metal products

4. Investment in the construction of new power plants, in power distribution and transmission

5. Production of medical supplies and equipment, construction of warehouses for preservation ofpharmaceutical products, reserves of medicines for human use in case of natural disasters anddangerous epidemics

6. Production of equipment used for testing toxic substances in foodstuffs

7. Development of the petrochemical industry

8. Production of coke and active coal

9. Production of plant protection drugs, pesticides, preventive and curative drugs for animals andaquatic creatures; veterinary drugs

10. Materials for the production of medicines or medicines for prevention or treatment of socialdiseases; vaccines; biological products; medicines produced from pharmaceutical materials;Eastern medicines

11. Investment in the construction of facilities for biological experimentation, assessment of theavailability of medicines; pharmaceutical establishments satisfying GMP standards inproducing, preserving, testing, and carrying out clinical tests of medicines; planting, rearing orharvesting and processing of pharmaceutical materials

12. Development of sources of pharmaceutical materials and production of medicines frompharmaceutical materials; projects for research or substantiation of scientific grounds forprescriptions for eastern medicines and formulation of standards for testing of prescriptions foreastern medicines; survey and statistics of types of pharmaceutical materials used for theproduction of medicines; collection, inheritance and application of prescriptions for Easternmedicines; finding, exploitation and use of new pharmaceutical materials

13. Production of electronic appliances

14. Production of machines, equipment and detail assemblies for the following sectors: oil and gasexploitation, mining, energy and cement; production of large-sized lifting equipment;production of machine tools for metal processing and metallurgy equipment



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15. Investment in the manufacture of high- and medium-voltage electric devices or generators oflarge capacity

16. Investment in the production of diesel engines; investment in the repair or building of ships;equipment and spare parts for transportation ships and fishing ships; production of dynamicand hydraulic machinery and spare parts and compressing machines

17. Production of equipment, vehicles and machinery for construction; technical equipment for thetransportation sector; locomotives and carriages

18. Investment in the manufacture of machine tools, machinery, equipment and components foragricultural and forest production; machinery for food processing; irrigation equipment

19. Investment in the production of equipment, machinery for textiles, garments and leatherindustries

II. Breeding, rearing, growing and processing of agricultural, forest and aquaculture products;salt making; production of artificial strains, new plant varieties and livestock breeds

20. Growing of plants for pharmaceutical purposes

21. Investment in the post-harvest preservation of agricultural products; preservation of agriculturaland aquaculture products and foodstuffs

22. Production of bottled or canned fruit juices

23. Production and refining of feed for cattle, poultry and aquatic resources

24. Technical services for planting industrial and forest trees, husbandry, aquaculture, protection ofplants and livestock

25. Production, multiplication or crossbreeding for new plant varieties or livestock breeds

III. Use of high technology and modern techniques; protection of the ecological environment;research, development and nursery garden of high technology

26. Manufacture of equipment for responding to and dealing with oil spills

27. Manufacture of equipment for waste treatment

28. Investment in the construction of technical facilities and works: laboratories and experimentalstations to apply new technology to production; investment in the establishment of researchinstitutes

IV. Labour-intensive industries

29. Projects regularly employing between 500 and 5,000 employees.



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V. Construction and development of infrastructures

30. Construction of infrastructures serving production and business of cooperatives and life ofcommunities in rural areas

31. Investment in and commercial operation of infrastructures and investment in the production ofindustrial complexes, industrial spots, complexes in rural trade villages

32. Construction of water plants and water supply systems for civil and industrial use; investmentin the construction of water drainage systems

33. Construction and upgrading of bridges, roads, terminals, airports, seaports, railway stations, busstations and parking lots; establishment of new railway routes

34. Construction of technical infrastructures of concentrated population areas in the geographicalareas in Appendix II to this Decree

VI. Development of education, training, health care, physical training, sports and national culture

35. Investment in the construction of infrastructures for education and training establishments;investment in the construction of people-founded and private schools and education andtraining establishments at the levels of pre-school education; general education, vocational high-school education and tertiary education

36. Establishment of people-founded and private hospitals

37. Construction: physical training or sport centres, training facilities and physical training andsports clubs; establishments for production, manufacture and repair of equipment, supplies andequipment for physical training and sports

38. Establishment of national cultural houses; national dance, music and song troupes; theatres, filmstudios, cinemas; establishments for production, manufacture and repair of national musicalinstruments; maintenance and preservation of museums, national cultural houses and cultureand arts schools

39. Investment in the construction of national tourist sites, ecological tourist sites and cultural parksfor sports, entertainment and recreation activities

VII. Development of traditional trades and occupations

40. Development of traditional trades and occupations for production of fine-art and handicraftgoods; processing of agricultural products and foodstuffs and cultural products

VIII.Other manufacturing and service sectors

41. Provision of Internet connections, access and application services and points for accessing publictelephones in areas in Appendix II to this Decree



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42. Development of mass transit, including transportation by ships, aircraft; railway transportation;road transportation of passengers by cars with 24 seats or more; transportation of passengers bymodern and high-speed vehicles by inland waterway; container transportation

43. Investment in the relocation of production establishments to non-urban areas

44. Investment in the construction of class-I marketplaces and exhibition centres

45. Production of children’s toys

46. Activities in mobilizing capital and lending capital of people’s credit funds

47. Legal consultancy, services of consultancy on intellectual property and technology transfer

48. Production of various types of materials for production of pesticides

49. Production of base chemicals, purified chemicals, special-use chemicals and dyes

50. Production of materials for production of detergents and additives for the chemical industry.

51. Production of paper, cartons, artificial planks from domestic agricultural and forest materials;production of pulp

52. Weaving and fashioning of textile products; production of silk and fibres of all types; tanningand processing of leather

53. Investment projects on production activities in industrial parks established under the directionof the Prime Minister



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Appendix 2b: List of geographical areas entitled toinvestment incentives (Promulgated together with theGovernment’s Decree No. 108/2006/ND-CP, September 22,2006)No Province Areas with extremely difficult Areas with difficult

socio-economic conditions socio-economic conditions

1 Bac Kan All districts and towns

2 Cao Bang All districts and towns

3 Ha Giang All districts and towns

4 Lai Chau All districts and towns

5 Son La All districts and towns

6 Dien Bien All districts and Dien Bien city

7 Lao Cai All districts Lao Cai City

8 Tuyen Quang Na Hang and Chiem Hoa districts Ham Yen, Son Duong and Yen Son districts and Tuyen Quang town

9 Bac Giang Son Dong district Luc Ngan, Luc Nam,Yen The and Hiep Hoa districts

10 Hoa Binh Da Bac and Mai Chau districts Kim Boi, Ky Son, Luong Son, Lac Thuy,Tan Lac,Cao Phong, Lac Son and Yen Thuy districts

11 Lang Son Binh Gia, Dinh Lap, Cao Loc, Loc Binh,Trang Bac Son, Chi Lang and Huu Lung districtsDinh, Van Lang and Van Quan districts

12 Phu Tho Thanh Son and Yen Lap districts Doan Hung, Ha Hoa, Phu Ninh, Song Thao,Thanh Ba,Tam Nong and Thanh Thuy districts

13 Thai Nguyen Vo Nhai anh Dinh Hoa districts Dai Tu, Pho Yen, Phu Luong, Phu Binh and Dong Hy districts

14 Yen Bai Luc Yen, Mu Cang Chai and Tram Tau districts Tran Yen, Van Chan, Van Yen and Yen Binh districts and Nghia Lo town

15 Quang Ninh Ba Che and Binh Lieu districts, Co To island Van Don districtdistrict, islands and offshore islands under provincial authority

16 Hal Phong Bach Long Vy and Cat Hal island districts

17 Ha Nam Ly Nhan and Thanh Liem districts

18 Nam Dinh Giao Thuy, Xuan Truong, Hai Hau and Nghia Hung districts

19 Thai Binh Thai Thuy and Tien Hai districts

20 Ninh Binh Nho Quan, Gia Vien, Kim Son,Tam Diep and Yen Mo districts

21 Thanh Hoa Muong Lat, Quan Hoa, Ba Thuoc, Lang Chanh, Thach Thanh and Nong Cong districtsThuong Xuan, Cam Thuy, Ngoc Lac, Nhu Thanh and Nhu Xuan districts

22 Nghe An Ky Son,Tuong Duong, Con Cuong, Que Phong, Tan Ky, Nghia Dan and Thanh Chuong districtsQuy Hop, Quy Chau and Anh Son districts

23 Ha Tinh Huong Khe, Huong Son and Vu Quang districts Duc Tho, Ky Anh, Nghi Xuan,Thach Ha, Cam Xuyen and Can Loc districts

24 Quang Binh Tuyen Hoa, Minh Hoa and Bo Trach districts Other districts

25 Quang Tri Huong Hoa and Dac Krong districts Other districts

26 Thua Thien Hue A Luoi and Nam Dong districts Phong Dien, Quang Dien, Huong Tra, Phu Loc and Phu Vang districts

27 Da Nang Hoang Sa island district

28 Quang Nam Dong Giang,Tay Giang, Nam Giang, Phuoc Son, Dai Loc and Duy Xuyen districtsBac Tra My, Nam Tra My, Hiep Duc,Tien Phuoc and Nui Thanh districts and Cu Lao Cham island



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No Province Areas with extremely difficult Areas with difficult socio-economic conditions socio-economic conditions

29 Quang Ngai Ba To,Tra Bong, Son Tay, Son Ha, Minh Long, Nghia Hanh and Son Tinh districtsBinh Son and Tay Tra districts and Ly Son island district

30 Binh Dinh An Lao, Vinh Thanh, Van Canh, Phu Cat and Hoai An and Phu My districtsTay Son districts

31 Phu Yen Song Hinh, Dong Xuan, Son Hoa and Phu Hoa Song Cau,Tuy Hoa and Tuy An districtsdistricts

32 Khanh Hoa Khanh Vinh and Khanh Son districts,Truong Sa Van Ninh, Dien Khanh and Ninh Hoa districts and island district and islands under provincial Cam Ranh townmanagement

33 Ninh Thuan All districts

34 Binh Thuan Phu Quy island district Bac Binh,Tuy Phong, Duc Linh,Tanh Linh, Ham Thuan Bac and Ham Thuan Nam districts

35 Dak Lak All districts

36 Gia Lai All districts and towns

37 Kon Tum All districts and towns

38 Dak Nong All districts

39 Lam Dong All districts Bao Loc town

40 Ba Ria - Vung Tau Con Dao island district Tan Thanh district

41 Tay Ninh Tan Bien,Tan Chau, Chau Thanh and Ben Cau Other districtsdistricts

42 Binh Phuoc Loc Ninh, Bu Dang and Bu Dop districts Dong Phu, Binh Long, Phuoc Long and Chon Thanh districts

43 Long An Duc Hue, Moc Hoa,Tan Thanh, Duc Hoa, Vinh Hung and Tan Hung districts

44 Tien Giang Tan Phuoc district Go Cong Dong and Go Cong Tay districts

45 Ben Tre Thanh Phu, Ba Chi and Binh Dai districts Other districts

46 Tra Vinh Chau Thanh and Tra Cu districts Cau Ngang, Cau Ke and Tieu Can districts

47 Dong Thap Hong Ngu,Tan Hong,Tam Nong and Thap Other districtsMuoi districts

48 Vinh Long Tra On district

49 Soc Trang All districts Soc Trang town

50 Hau Giang All districts Vi Thanh town

51 An Giang An Phu,Tn Ton,Thoai Son,Tan Chau and Tinh Other districtsBien districts

52 Bac Lieu All districts Bac Lieu town

53 Ca Mau All districts Ca Mau city

54 Kien Giang All districts, islands and offshore islands under Ha Tien and Rach Gia townsprovincial management

Other localities Hi-tech parks and economic zones entitled to Industrial parks established under decisions of preferences under establishment decisions of the Prime Ministerthe Prime Minister



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Appendix 3: Survey question asked of FDI firms in themining and quarrying sector

1. General Information about the firm:

1.1 Name of the firm: _________________________________________________________

1.2 Address of the firm: ________________________________________________________

1.3 City/province: ________________________

1.4 Year of establishment: __________________

1.5 Years of operation: _____________________

1.6 Type of firms: 100 per cent foreign owned ■■Join venture ■■Business contract (BCC, BOT, BTO, BT) ■■Other: ■■_______________________________________________________________________

1.7 Country of origin: _________________________________________________________

1.8 Address of subsidiary: ______________________________________________________

1.9 Area of production: a) Mining and extraction of coal, lignite, peat ■■b) Extraction of crude petroleum and natural gas ■■c) Mining of uranium and thorium ores ■■d) Mining of metal ores ■■e) Other non-metal mining ■■

1.10 Total registered capital: _____________________ USD

1.11 Implemented capital: ______________________ USD

1.12 New additional investment in the last five years _______________________ USD

1.13 Export of your output:____________ per cent of total output

1.14 How many FDI projects have you invested in in Vietnam apart from your firm? _________

In which area? a) Mining and quarrying ■■b) Refining or processing ■■c) Other: ■■



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2. Role of investment incentives in the firm’s investment decision:

2.1 Please rank the importance of each of the following factors influencing your decision ofinvestment in a foreign country in general:

Factors influencing the invt. decisions: Rank the importance of the factors(1: not important; 5: very important)

Legal environment ____________________________

Industry infrastructure ____________________________

Investment incentives ____________________________

Market size ____________________________

Cost of production ____________________________

Location of natural resource ____________________________

Other factors (please specify) ____________________________

2.2 When investing in Vietnam, is your firm subject to enjoy any investment incentive providedby Vietnamese government?

YES ■■ NO ■■

Please evaluate the extent and importance of incentives provided by the Vietnamesegovernment to your firm’s investment decision as described below:

Tax incentives:

Type of incentives Duration Estimated Rank the value importance of (VND) the incentive for

the firm’s investment decision(1: not important; 5: very important)

Corporate tax exemption _____________ __________ ______________

Property tax exemption _____________ __________ ______________

Remission of export-import tariff _____________ __________ ______________

Remission of land use tax/fees _____________ __________ ______________

Other tax incentives (pls. specify) _____________ __________ ______________



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Subsidies:



Cash grants _____________ __________ ______________

Preferable interest loans _____________ __________ ______________

Training subsidies _____________ __________ ______________

Grants for R&D _____________ __________ ______________

Other subsidies (pls. specify) _____________ __________ ______________

Regulatory incentives:



Infrastructure in EPZs or IZs _____________ __________ ______________

Services given by FDI promotion centres _____________ __________ ______________

Other subsidies (pls. specify) _____________ __________ ______________

2.3 Do you think that the investment incentives provided in Vietnam are more attractive thanwhat you have been offered in other countries?




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2.4 If there were no investment incentives provided by the government, while other countries offeryou investment incentives, would you still decide to locate your investment in Vietnam?


WHY ? _________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

2.5 Have you actually received the incentives as you expected in process of your firm operation?


If NO, please explain WHY?: ________________________________________________

_______________________________________________________________________

_______________________________________________________________________

2.6 Were there any performance commitments/agreements signed/agreed upon by your firm withlocal government authorities?


If YES, pls. indicate their nature below:

• Commitments relating to economic aspects: Technological transfer ■■Export performance; ■■Domestic input requirements ■■Other requirements (please specify) ■■_____________________________________________________________________

• Commitments relating to social aspects: Use of local employees ■■Contribution to local development ■■Other: (please specify) ■■_____________________________________________________________________

• Commitments relating to environmental aspects: EIA appraisal ■■Environmental deposit ■■Other (please specify) ■■_____________________________________________________________________



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3. Role of investment incentives to the firm’s sustainable development behaviour:

3.1 Please rank the importance of each of the following factors influencing your firm’s behaviourto sustainable development:

Determinants of SD behaviour of firms Rank the importance of the factors(1: not important; 5: very important)

1. National regulation framework:

+ Economic regulation ____________________________

+ Social regulation ____________________________

+ Environment regulation ____________________________

2. National regulation enforcement:

+ Economic regulation ____________________________

+ Social regulation ____________________________

+ Environment regulation ____________________________

3. Domestic policy incentives: (economic; social and environment) ____________________________

4. Your parent company’s policy (corporate and social responsibility, etc.) ____________________________

5. Market forces (customer, exporters, international requirements, etc.) ____________________________

6. Community (public) pressure ____________________________

Other factors: (please specify) ____________________________



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3.2 Please assess your contribution to the national/local sustainable development of Vietnam:

Determinants of SD behaviour of firms Rank the firm’s contribution(1: not significant; 5: very significant)

Economic factors:

– Growth of production overtime ____________________________

– Export performance ____________________________

– Government tax revenue ____________________________

– Investment generation in the ____________________________industry

– Development of downstream and ____________________________up-stream industries

– Technology transfer to domestic firms

Social factors:

– Employment generation ____________________________

– Income of labour ____________________________

– Local social development ____________________________

– Mass organizations activities ____________________________

Environment factors:

– Environmental standards ____________________________

– Response to the use of local land ____________________________impact

– Environmental tax/fees. ____________________________

3.3 Has your firm been granted any of the following ISO certificates:

ISO 9000 ■■

ISO 14001 ■■

Other: (please specify) ■■

_______________________________________________________________________



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3.4 Is your firm inspected by local authorities in reference to the terms of your performanceindicated in question 2.6?


How often? ______________________________________________________________

3.4 Please estimate your average annual expenditure for the activities ensuring your firm’ssustainable social and environmental development over the last five years.

_______________________ (VND)

3.5 Does your firm have the units or organizations listed below:

Unit Yes or No

Environmental management division/unit/personnel __________________

Trade union __________________

Women’s union __________________

Technology and or R&D division __________________

Social works __________________

Thank you very much for your kind cooperation!



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Documents

Sustainable Development Impacts of Investment Incentives3.1 Overview of development and investment policies in the mining and quarrying 15 industry 3.2 Investment incentives in the